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  • Federal Health Care Spending Tops Social Security for the First Time January 25, 2016 - By Sarah Ferris – 01/25/16 03:19 PM EST Spending on federal healthcare programs outpaced spending on Social Security for the first time in 2015, according to an expansive report from the congressional budget scorekeeper released Monday. The government spent $936 billion last year on health programs including Medicare, Medicaid and subsidies related to the Affordable Care Act, a […]
  • IRA Charitable Rollovers Made Permanent January 24, 2016 - Posted by:  Heinz Brisske IRA Charitable Rollovers are now a permanent part of the tax code. On December 18, 2015, Protecting Americans from Tax Hikes (PATH) was passed by both the House of Representatives (318 to 109) and by the Senate (65 to 33). The law provides that each IRA owner over age 70½ may […]
  • IRA Charitable Rollovers Made Permanent January 24, 2016 - Posted by:  Heinz Brisske IRA Charitable Rollovers are now a permanent part of the tax code. On December 18, 2015, Protecting Americans from Tax Hikes (PATH) was passed by both the House of Representatives (318 to 109) and by the Senate (65 to 33). The law provides that each IRA owner over age 70½ may […]
  • Battle Lines Being Drawn in Medicare Premium Increase Proposal January 23, 2016 - Posted by:  Heinz Brisske A tight year for Medicare could force millions of seniors to pay at least $650 more for public insurance in 2016, sparking a likely showdown between policymakers and activist groups, according to news sources. AARP promises to fight the 52 percent increase in premiums forecast for nearly a third of Medicare […]
  • Battle Lines Being Drawn in Medicare Premium Increase Proposal January 23, 2016 - Posted by:  Heinz Brisske A tight year for Medicare could force millions of seniors to pay at least $650 more for public insurance in 2016, sparking a likely showdown between policymakers and activist groups, according to news sources. AARP promises to fight the 52 percent increase in premiums forecast for nearly a third of Medicare […]
  • No Social Security COLA Increase for 2016 January 22, 2016 - Posted by:  Heinz J. Brisske Conjecture regarding the cost-of-living-adjustment (COLA) for Social Security recipients has been reported by various media sources for some time. The Social Security Administration just announced that, in fact, there will be no COLA adjustment for 2016. This is only the third time in 40 years that Social Security recipients, disabled […]
  • No Social Security COLA Increase for 2016 January 22, 2016 - Posted by:  Heinz J. Brisske Conjecture regarding the cost-of-living-adjustment (COLA) for Social Security recipients has been reported by various media sources for some time. The Social Security Administration just announced that, in fact, there will be no COLA adjustment for 2016. This is only the third time in 40 years that Social Security recipients, disabled […]
  • Inflation Adjustments in Revenue Procedure 2015-53 January 21, 2016 - Posted by:  Beth Cwik October 21, 2015  The Internal Revenue Service recently announced the 2016 Inflation Adjustments in Revenue Procedure 2015-53. ADJUSTED – Estate and Trust Tax Rate Tables – for taxable years beginning in 2016 the 15% rate applies to income not over $2,550 and the maximum 39.6% rate applies to income over $12,400 […]
  • Inflation Adjustments in Revenue Procedure 2015-53 January 21, 2016 - Posted by:  Beth Cwik October 21, 2015 The Internal Revenue Service recently announced the 2016 Inflation Adjustments in Revenue Procedure 2015-53. ADJUSTED – Estate and Trust Tax Rate Tables – for taxable years beginning in 2016 the 15% rate applies to income not over $2,550 and the maximum 39.6% rate applies to income over $12,400 […]
  • Tax Return Due Dates January 20, 2016 - Posted by:  Beth Cwik October 21, 2015 New law changes a number of due dates for tax returns. With respect to partnership and S corporation tax returns, the new due date is March 15 for calendar year partnerships and the 15th day of the third month after the close of the fiscal year for fiscal year […]

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Life and Legacy Resources

Life & Legacy Planning Group History
The Life & Legacy Planning Group of Huck Bouma, PC was formed when the law firm of Huck & Brisske, LLC merged its practice into that of Huck Bouma, PC. The Life & Legacy Planning Group puts Huck Bouma in the position of being the preeminent Estate Planning, Elder Law and Estate Administration firm in the western suburbs. No other suburban firm has the number of practitioners, paralegals and CPAs specializing in the full array of Estate Planning, comprehensive Tax Planning and Compliance, Estate and Trust Administration, Elder Law, Special Needs Planning and Guardianship and VA Pension Planning services.

Huck & Brisske had its roots in a practice founded by Allen S. Greene, a general practice attorney of long-standing and high repute in Wheaton (DuPage County) Illinois. For many years the law firm of Greene, Jones & Brisske serviced clients in Wheaton. Robert E. Jones left Huck & Brisske to join Huck Bouma in 1999, which directly led to Kevin Huck and Heinz Brisske establishing the firm of Huck & Brisske, LLC, a boutique Estate Planning, Elder Law and Estate Administration firm in DuPage County.

Through the years, Huck & Brisske and Huck Bouma have had a very strong informal relationship, working together to represent many common clients. In addition to the Bob Jones connection, Jim Huck, of Huck Bouma, and Kevin Huck, of Huck & Brisske, are brothers. Once the two firms formalized their relationship by merging in 2013, the Life & Legacy Planning Group was a natural extension of the extensive depth of practice and services available to clients in the areas related to Estate and Trust Planning, Elder Law and Estate and Trust Administration.

The Life & Legacy Planning Group of Huck Bouma practices exclusively in the areas of Wealth Transfer and Estate Planning, Special Needs Planning and Guardianship, Elder Law, VA Pension Planning, and Estate Administration.

Life and Legacy Planning Group History

The Life & Legacy Planning Group of Huck Bouma, PC was formed when the law firm of Huck & Brisske, LLC merged its practice into that of Huck Bouma, PC. The Life & Legacy Planning Group puts Huck Bouma in the position of being the preeminent Estate Planning, Elder Law and Estate Administration firm in the western suburbs. No other suburban firm has the number of practitioners, paralegals and CPAs specializing in the full array of Estate Planning, comprehensive Tax Planning and Compliance, Estate and Trust Administration, Elder Law, Special Needs Planning and Guardianship and VA Pension Planning services.

Huck & Brisske had its roots in a practice founded by Allen S. Greene, a general practice attorney of long-standing and high repute in Wheaton (DuPage County) Illinois. For many years the law firm of Greene, Jones & Brisske serviced clients in Wheaton. Robert E. Jones left Huck & Brisske to join Huck Bouma in 1999, which directly led to Kevin Huck and Heinz Brisske establishing the firm of Huck & Brisske, LLC, a boutique Estate Planning, Elder Law and Estate Administration firm in DuPage County.

Through the years, Huck & Brisske and Huck Bouma have had a very strong informal relationship, working together to represent many common clients. In addition to the Bob Jones connection, Jim Huck, of Huck Bouma, and Kevin Huck, of Huck & Brisske, are brothers. Once the two firms formalized their relationship by merging in 2013, the Life & Legacy Planning Group was a natural extension of the extensive depth of practice and services available to clients in the areas related to Estate and Trust Planning, Elder Law and Estate and Trust Administration.

The Life & Legacy Planning Group of Huck Bouma practices exclusively in the areas of Wealth Transfer and Estate Planning, Special Needs Planning and Guardianship, Elder Law, VA Pension Planning, and Estate Administration.

Case Studies

Special Planning for a Special Child

The use of retirement plan distributions and a stand-alone retirement trust to protect a Special Needs child

George and Debra have been clients of our firm for many years. They have a mentally challenged daughter, Samantha, who is in her twenties. Samantha lives with her parents. Most of George and Debra’s assets are in retirement assets, primarily IRAs owned by George. George and Debra’s primary concern is Samantha’s future well-being and what will happen to her when they are no longer available to care and provide for her. They retained us to help them structure a plan in light of these special circumstances.

First, we explored the concept of a Special Needs Trust for Samantha, one that would not jeopardize any public benefits to which she may be entitled, yet would provide for her supplemental needs, those not covered by such benefits. George and Debra indicated that they did not want Samantha to be limited for her support to public benefits. They felt that they had accumulated enough wealth to provide for all of Samantha’s needs, not just those supplemental to what she might receive from a governmental agency. In addition, they had no other children, and therefore did not have to worry about short-changing other beneficiaries in favor of Samantha.

We recommended that George and Debra provide for Samantha after their death through the use of a discretionary trust, to be administered by a trusted family member, with an institutional successor trustee. We included various caretaker provisions so that Samantha would also have the benefit of personal, in addition to financial, benefits.

We first had to assure that we fully utilized both George’s and Debra’s applicable exclusion amount for federal estate tax purposes and to minimize their exposure to state death taxes so that they would not pay any more federal or state estate taxes than absolutely necessary. By using cross general powers of appointment, we were able to assure that they would maximize their estate tax exemptions to the greatest extent possible.

The more difficult planning involved George’s substantial retirement assets. Upon George’s death, he wanted to assure that Debra would have the maximum use of his IRAs for her continued support, but since those IRAs will only qualify for the unlimited marital deduction at his death, we drafted beneficiary designations that will allow Debra to disclaim all or a portion of those benefits. The disclaimed portion will then be distributed to George’s by-pass trust, of which Debra is a beneficiary, and where they will qualify for his applicable exclusion amount. Thus, we left Debra some post-mortem planning options that will allow her to make decisions on the basis of the facts and circumstances as they exist at George’s death, rather than presuming those circumstances today.

Finally, we were able to use several recent IRS rulings to their advantage by creating a stand-alone retirement trust for Samantha, one that will allow accumulation of IRA distributions without jeopardizing the ability to “stretch” the distributions from George’s IRAs, and thereby taking advantage of continued tax-deferred growth in the IRA after George’s and Debra’s death. The wealth-creation potential of such a strategy is substantial, and will allow George and Debra not only to provide generously for Samantha’s well-being during her life, but will also allow them to leave a substantial inheritance to more remote family members at Samantha’s death.

Samantha, though challenged, is competent to make decisions for herself. We wanted to make sure that Samantha, who had some modest assets, would have her wishes respected for the distribution of her assets at her death by preparing a will for her. More importantly, we drafted a Durable Power of Attorney for Property for Samantha so that her parents will be able to help her manage her assets during her life, and we also prepared advance medical directives (Durable Power of Attorney for Health Care, Living Will and HIPAA Authorization) to assure that agents of Samantha’s choosing will be in a position to make appropriate health care and medical decisions for her in the event that she is unable to make such decisions for herself.

Integrating Limited Partnership in Estate Plan

Creating and preserving a family wealth model and accomplishing estate tax reduction through valuation discounts

Derek and Lily were savers. They believed in and practiced delayed gratification. As a result, even with reasonably modest salaries, they had accumulated substantial farm land in several states. But they needed to find a way to manage the various farms that they owned and to pass on their wealth and their investment knowledge to their three children; they wanted to create a family wealth model that would enhance not only the management of their investment properties, but also pass on to their children the lessons they had learned through their lives. Finally, they were concerned about the substantial estate tax that would be generated at their deaths if they took no action.

We first designed a foundational plan with Living Trusts to set up an overall distribution of their estates at their deaths. After drafting to maximally reduce their overall estate tax, we provided for asset-protected trusts for their children. Derek and Lily liked the idea that the trusts that they created for their children would not be available in the event one of them suffered a divorce later in life. Though they trusted their children and had no wish to “control” their inheritance from the grave, they also were wise enough to understand that providing their children with this protection was a gift, since it was something that the children themselves would have great difficulty accomplishing on their own.

We then had them set up a Family Limited Partnership to own their farm land. In this way, they are able to consolidate management of diverse assets under one umbrella entity, with centralized management. This vehicle also gives them the opportunity, in the future, to do some aggressive gift planning while still maintaining control of the assets that they give away. A Family Limited Partnership is a useful vehicle for transferring wealth to a younger generation because it allows the senior generation to maintain control, while at the same time transferring value to the younger generation. It also effectively reduces the size of the taxable estate in the hands of Derek and Lily, both as the result of gifts that are made during life and as the result of potential valuation discounts.

By using a limited partnership, Derek and Lily are able to potentially make larger gifts than would otherwise be possible. Because limited partnership interests may qualify for valuation discounts, they will be able to transfer larger chunks of their estate through annual exclusion gifting than would otherwise be possible. And, at death, their limited partnership interests will likely be valued below the value of the farmland owned by the limited partnership, thus reducing their overall estate tax even more.

As time goes on, Derek and Lily will likely build upon their “family investment plan” by combining Defective Grantor Trusts for their children, giving them additional opportunity to transfer value to their children, and thus further reducing their taxable estates. Their overall objective of bringing their children into the family wealth model that they are setting up will require that they actively meet with and mentor their children on an ongoing basis, and slowly bring them into management positions within the partnership over time.

Planning Under Extraordinary Circumstances

Lifetime gifts and creative use of trusts provide estate tax relief

An old college friend, who practices law in a neighboring county, called to ask me to help him with a particularly difficult planning situation. Roger, a physically robust gentleman of 89 had lapsed into mental incapacity, and his family had just discovered that he had a substantial taxable estate. Roger had never been married and had no children of his own. He had two surviving brothers and 25 nieces and nephews.

His existing Living Trust provided that his brothers were to split one-half of Roger’s estate, and the balance was to be distributed among his nieces and nephews. Though Roger had been a blue collar employee for most of his working life, he had amassed a small fortune, substantially in excess of the federal estate tax exclusion. Doing nothing would have meant paying millions of dollars in estate taxes to both the federal and the state government upon his death, a situation that his family considered intolerable, and one that Roger would have abhorred.

A thorough examination of Roger’s existing estate planning documents revealed a valid Durable Power of Attorney for Property which named his brother, Frank, as agent. It gave Frank the power to alter or amend existing trusts, and to draft new trusts. That power became the basis for substantial additional estate planning that we were able to accomplish for Roger.

First, we had Frank create an intentionally defective grantor trust (IDGT), naming Roger’s brothers and nieces and nephews as beneficiaries in the same proportions as Roger had done in his Living Trust. We took advantage of Roger’s lifetime one million dollar gift tax exclusion to fund the irrevocable trust, and then also made annual exclusion gifts to the trust for all the beneficiaries, thus removing $324,000 from Roger’s taxable estate. Considering the federal estate tax was a flat tax of 45%, the annual exclusion gifts will save Roger’s estate $145,800 in federal estate tax for each year that such gifts are made, not to mention the Illinois state estate tax savings. The growth in value of the one million dollar gift is now also outside Roger’s taxable estate, as is the income generated by that one million dollar gift. Finally, because the trust is “defective” for income tax purposes, we are able to have Roger pay the income tax generated by the assets in the trust without having those payments constitute an additional gift to the beneficiaries.

Finally, we instituted a “rolling GRAT” strategy with a portion of Roger’s stock portfolio, whereby we created separate two-year zeroed-out Grantor Retained Annuity Trusts (“GRATs”). A GRAT is intended to pass a portion of the contributed asset’s appreciation out of Roger’s estate without any gift or estate tax. The success of that strategy will be determined by two factors: stock market returns on the stocks that we used to fund the GRATs, and the length of Roger’s life. We are confident of at least modest success because research shows that the odds are about 95% that a rolling GRAT strategy will move at least some wealth out of Roger’s estate if he survives for 5 years.

Taking advantage of a power that Roger left to his brother as his agent under a Durable Power of Attorney, we were able to accomplish, at least partially, one of Roger’s enduring goals: to keep as much of his estate out of the hands of the tax man as at all possible. We obviously would have liked Roger to have been competent to participate in his planning, but even without his direct participation, we were able to preserve more of his wealth for his family than would have been the case had we not intervened.

Charitable Giving as a Part of an Overall Estate Plan

Incorporating charitable trusts and life insurance planning to accomplish charitable goals and estate tax benefits

David and Laura came to us as a referral from a financial planner. They had amassed a substantial estate, and had some very specific family and charitable goals.

As with all of our clients, we first obtained detailed personal and financial information from them. We then met to discuss the specifics of their current situation, and we learned about their children, their goals and aspirations, and their financial and personal philosophy. Using that information, we designed a foundational plan that accomplishes many of their family goals and that allowed us to add some additional planning to supplement and further enhance their overall objectives.

The foundational plan included Living Trusts that sheltered each of their available exclusions from estate tax, and then provided trusts for the survivor of them. At the death of the last of them to die, they established beneficiary-controlled, asset-protected trusts for their children. Since they planned to do their charitable giving during their lives, no charitable gifts were made except as an ultimate disposition.

Once their trusts were fully funded and their assets were appropriately allocated between their trusts, we designed and drafted a Net Income Charitable Remainder Trust with make-up provisions (NIMCRUT). With the help of their financial advisor, we had them contribute some of their highly appreciated assets to the NIMCRUT. This allowed them to avoid the capital gains tax on the sale of those assets, to put the entire value of those assets to work for them without reduction for capital gains taxes, and to claim a substantial charitable income tax deduction. They are now able to generate a stream of income for the rest of their lives from those investments. The entire balance of the NIMCRUT at the death of the last of them to die will be contributed to the charities of their choosing.

Finally, in order to replace the assets that were contributed to the NIMCRUT, they created an irrevocable trust and had the trust purchase a policy of second-to-die life insurance. They are able to use the income generated by the NIMCRUT to pay the premiums for the insurance policy if they choose. The policy proceeds will be paid to trusts for their children at the death of the last of them to die, and will replace what the children “lost” as a result of the contribution that was made to the NIMCRUT. Because the policy is owned in an irrevocable trust, it will not be subject to estate tax, either at the federal or state level. Thus the children will enjoy a tax-free inheritance in the amount of the death benefit of the policy, in place of the assets contributed to the NIMCRUT, which would certainly have been subject to estate tax had they been left to the children instead.

David and Laura were able to accomplish both their family and their charitable objectives. Through appropriate charitable planning they were actually able to enhance, rather than interfere with, their ability to benefit their children. They felt that they had accomplished a win-win situation.

Integrated Planning in Tragic Circumstances

Preserving family goals and accomplishing wealth planning through team work and integration of various disciplines

Becky called us one afternoon several years ago. She was crying and obviously distraught. We had known Becky and her husband, Kevin, for several years, having prepared wills for them when they were newly married, with two young daughters. The girls were now pre-teens.

Becky told us that Kevin had died very unexpectedly. He had just been killed in an automobile accident.

Becky was understandably distressed about her loss. She was also concerned about the fact that Kevin had always been the breadwinner for the family, and that now she would be the sole support of her family. The girls were obviously her primary concern, from an emotional, financial and parental standpoint.

We were able to refer Becky to a personal injury attorney, who filed suit to recover damages as the result of Kevin’s death. In the meantime, we helped Becky negotiate the administration of Kevin’s estate, and thus relieved her of the burden of worrying about managing the financial and legal aspects of the death of her husband.

The personal injury suit resulted in a substantial settlement for Becky and her girls. Unfortunately, that was just the beginning. The judge wanted to set up guardianship accounts for the girls that would have allowed a distribution to them as each turned 21 years of age. Becky and Kevin had taken pains to structure their wills in such a way that the girls’ inheritance would stay protected in trusts until they were much older. We were able to intervene in the personal injury action on behalf of the girls and work with their guardian ad litem, appointed by the court, to accomplish Becky’s goal of guaranteeing that the money they received as a result of their dad’s death would remain in trust until they were much older. They now each have a substantial fund for the payment of their college and other necessary expenses as they grow up.

Once we accomplished a resolution to that issue, we referred Becky to a financial planner and worked with him to arrange her finances and investments in such a way that she could stay home with the girls and would not have to return to work on a full-time basis. In fact, she was able to be a stay-at-home mom for the first several years after Kevin’s death. We then also helped Becky draft a living trust wherein she set up additional trusts for the girls that provided them with security as they got older and which also afforded substantial protection from future creditors. Through her estate plan, Becky can be assured that, should she die prematurely, the money that she leaves to her daughters will be managed appropriately, and that the girls will have a good financial foundation upon which to build their lives.

The Importance of an Up-to-Date and Flexible Estate Plan

How to avoid unexpected and unwanted consequences

The following situation demonstrates the importance of regular and timely reviews of an estate plan. It also points up the desirability of including sufficient flexibility in an estate plan to allow for unanticipated circumstances.

A certified public accountant referred her client, Edith, to us. Edith’s husband, Walter, had died several years ago, and she asked us to review the administration of Walter’s estate, an administration that was being handled by another firm. Apparently, the estate had not yet been completely settled. The accountant had reviewed the federal estate tax return and had found errors, which led her to question the handling of the administration of the estate generally.

Walter had been head-strong, enjoyed being in control, and was accustomed to doing things according to his rules. He was an attorney by profession although he did not fully understand nor practice in the area of estate planning. Nonetheless, he drafted his own estate plan. He failed, however, to review and update his estate plan in the last several years of his life, despite the numerous financial and personal changes he experienced. The result was a plan that, in the end, failed to accomplish his most cherished goals. He had bequeathed certain assets that he thought had minimal value to his grandchildren, with the balance to be distributed to his children after his wife?s death. His primary goal was to ultimately benefit his children, but as it turned out, he had given the bulk of his estate to his grandchildren, at the expense of his children, due to the increase in value of assets bequeathed to his grandchildren after he drafted his estate plan.

We met with Walter’s wife and daughters, and reviewed the administration of his estate. They had already spent over $80,000 in legal fees and expenses on the administration, in part because Walter’s plan did not address a number of issues that required resolution at his death. We felt that it was in the estate’s best interest not to intervene and instead to allow the existing attorneys to close it. We were left, however, to deal with Walter’s mostly inflexible estate plan.

Most estate plans provide for some flexibility and post-mortem estate planning options. In his estate plan, Walter had left his wife little “wiggle room” to amend his plan to accommodate changed circumstances. As a result, we had few options. We immediately had Edith set up her own estate plan with her own assets, wherein she was able to primarily benefit her children. We also had her exercise a limited power of appointment that Walter had given her in his trust; unfortunately, the power was available for only limited assets, leaving the remainder to be distributed primarily to grandchildren, which Walter thought was appropriate when he drafted his plan, but which was no longer desirable in view of the changed circumstances and which he would no longer have wanted if he were alive.

With some additional, limited post-mortem estate planning, Edith will be able, over time, to direct more of Walter’s assets to their children. Considering her age, however, it is doubtful that she will have sufficient time to successfully affect the bulk of the assets in Walter’s estate.

Had Walter engaged in a regular review of his estate plan with an experienced estate planning attorney, his plan could have incorporated the flexibility necessary to avoid these pitfalls. It is impossible to predict the future, so, keeping your estate plan flexible and up-to-date is crucial and can often serve to rescue what otherwise would have been an undesirable and unintended result.

Estate Planner/Family Counselor

The role of the estate planning professional often goes far beyond application of his legal knowledge and expertise

When John first called, it seemed like a routine inquiry. However, that impression faded quickly as he continued to talk, informing me that he had been diagnosed with a terminal illness and that he wanted his wife, Donna, to take no part in his estate plan before or after his death. He insisted that we represent him alone, to the exclusion of his wife.

At our initial appointment, John again reaffirmed that he did not want Donna to have any control over the family finances after his death; he further indicated that he was prepared to file for divorce if necessary to assure that she would have no control of his estate. Furthermore, he was insistent that their teenage child receive large monthly allotments with no restrictions. In short, I had a client that was extremely, and justifiably, distraught, and he was acting irrationally and not in his family’s best interests.

We talked at length about his goals for his family, and his feelings toward Donna. I began to realize that John loved his wife very much and did not want to get divorced. That being the case, I convinced him to let us try to help him and his wife, together, design an estate plan that would accomplish both of their objectives and save their marriage at the same time. In essence, I needed to design a plan that would enable them to keep their family intact and, at the same time, give him control over his estate even beyond his lifetime.

I met with both John and Donna on a number of occasions to discuss the various estate planning options available to them as a couple. We also spent a good deal of time talking about their marriage, helping each one to understand the other. Donna understood that John simply needed to feel in control of his destiny, a control of which he had been robbed as the result of his medical diagnosis.

Both John and Donna eventually agreed to let us draft trusts for each of them. However, despite our continued counsel to the contrary, John insisted on setting up a trust for their teenage child that gave her a substantial monthly allowance, and over which his wife would have no control. We kept up a dialog with both John and Donna over the next several months, and continued to advise John of the risks involved in making such substantial gifts to a person of such a tender age.

Only days before John’s impending death, he called me and asked me, in a clear and concise manner, to amend his estate plan. In coming to terms with his situation, he now wished to give his wife control over his entire estate and the right to determine the timing and amount of their child’s inheritance. We discussed this revision in depth, as it was in stark contrast to his previously stated wishes. He emphatically confirmed his new instructions. We prepared new documents, and he signed the updated documents soon thereafter. John died peacefully a few days later, surrounded by his family.

Definitions

A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

A


A/B trust plan: See Marital / Family Trust Plan.

Abatement: The reduction of a bequest under a Will because there are not enough assets to pay the bequest. Ordinarily, all bequests are reduced pro rata.

Accounting: A detailed analysis of income, gains, losses, transactions, and assets that may be required by a Trustee or Executor. A Trust and Will may require an accounting in certain situations or the need for an accounting may be waived in other situations.

Ademption: A gift of specific property under a Will that fails because the property does not exist as a part of the estate at death.

Adjusted Gross Estate: The value of all property included in an Estate for estate tax purposes, less allowable debts and expenses.

Administration: The management and settlement of an Estate. See Probate.

Administrator: A person or institution named by the Court to represent the Estate when there is no Will, the Will did not name an Executor, or the named Executor is unable to act.

After-born Child: A child born after a Will or Trust is executed.

Agent: Under a Power of Attorney, the person granted the legal right to act on behalf of another (the Principal), for his or her sole and exclusive benefit. Also sometimes referred to as an Attorney-in-Fact.

Alien: A person who is not a citizen of the United States. A person who is a resident in the U.S., but not a citizen, can be an alien.

Alternate Valuation: A federal estate tax term for the value of the gross estate six months after the date of death (excluding property that was sold or otherwise disposed of before that date, in which case the date of sale or other disposition is used). The alternate valuation can be used only if federal estate tax actually due will be reduced as a result of such valuation. In an estate-tax return (IRS Form 706), the Executor can choose to value the estate by its fair market value on the Decedent’s date of death, or on the alternate valuation date, which is precisely six months after the date of death. If the assets have declined in value, this may be a useful tool to reduce estate taxes.

Alternate Valuation Date: The date, exactly six months after the date of death. See alternate valuation.

American Taxpayer Relief Act of 2012 (ATRA):  This is the major federal tax legislation enacted by Congress and signed by President Obama in January 2013. Among other things, it established a $5,000,000 estate tax Applicable Exclusion Amount that increases with inflation and added portability, allowing a surviving spouse to use any portion of a deceased spouse’s remaining AEA that doesn’t get used through the deceased spouse’s estate plan.

Ancestor: A person from whom another has descended (whether through a mother or father).

Ancillary Jurisdiction: A jurisdiction outside the state where the decedent officially resided. If a Decedent owned real estate in more than one state, his or her Estate may be subject to Ancillary Probate in each state in which the real estate is located.

Ancillary Probate: If a Decedent owned real estate in more than one state, his or her Estate may be subject to Probate in each state in which real estate is located. Thus, Probate will be required in the state in which the Decedent was a legal resident, and Ancillary Probate will be required in each state in which the Decedent owned real estate. By re-titling real estate owned outside the state of residence into a Trust, Ancillary Probate may be avoided.

Annual Gift Exclusion: This is the amount that someone can give to another person during the calendar year without having to pay gift tax. Under IRC Sec. 2503 the annual gift exclusion is $10,000, but that amount is inflation adjusted periodically. For gifts in 2014-2016 the annual exclusion is $14,000 per beneficiary. Annual gift exclusion amount increases typically get posted by the IRS in a publication in late Q3 or early Q4 each year, but they are adjusted on a different basis than the AEA.

Annual Exclusion Amount: Each person may gift up to $13,000 per year (in 2012) to any other person without incurring gift tax. Gifts in excess of $13,000 will result in a partial or full use of the maximum applicable exclusion amount and require a gift tax filing. There is no limit on the number of $13,000 gifts a person can make to different people in a year. To qualify for this exclusion, the gift must be of a present interest, meaning that the recipient can enjoy the gift immediately. Annual exclusion gifts are often used creatively to deplete Estates with prospective estate tax problems.

Anti-Lapse Statute: A statute that provides that the descendants of a deceased taker will receive the property bequeathed to the deceased taker. Application of the statute may be limited (e.g., in Illinois, it applies only if the deceased taker was a descendant of the Testator).

Applicable credit amount: An estate tax credit of $1,730,800 that permits the transfer of up to $5 million free of federal estate tax. The term also applies to a lifetime gift tax credit that permits the transfer of up to $5 million. The use of the gift tax credit reduces the estate tax credit at death.

Applicable Exclusion Amount: The amount of property that can pass free of tax pursuant to the applicable credit amount.

Applicable Federal Rate (AFR): A rate published monthly by the Treasury Department, broken down into short-term, mid-term, and long-term rates. The rate (or a variation) is used to determine loan interest rates that will not result in imputation of interest and to determine values under various split-interest planning devices (life estates, remainders, annuities, etc.).

Appointment of Agent to Control Disposition of Remains: A directive authorized by Illinois state statute that allows an individual to name the person or persons (Agent) authorized to make decisions regarding the disposition of his or her bodily remains after death.

Ascertainable Standard: Language describing, and in some cases limiting, how Trust income and/or principal can be used by a Trustee for a Beneficiary. A common example of the wording used to create an ascertainable standard is “health, education, maintenance and support,” sometimes referred to as a “HEMS” standard. Using such a standard in a trust has estate tax consequences. See Non-ascertainable standard.

Asset Protection Trust: A Trust that is not subject to the claims of a Beneficiary‘s creditors, including the Grantor if the Grantor is a beneficiary. Generally, if for the Grantor’s benefit, the Trust must be created outside the U.S. but also could be created in several jurisdictions. The most prominent U.S. asset protection jurisdictions are Alaska, Delaware, and Nevada. The effectiveness of asset protection Trusts that include the Grantor as a beneficiary is debated by attorneys.

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B


Basis: The acquisition cost of an asset, used to calculate gains and losses for income tax purposes.

Beneficiary: A person who receives or benefits from a Will, Trust, or contractual property such as insurance, qualified plans, annuities, or transfer on death accounts (TOD) or payable on death accounts (POD).

Bequest: A gift of personal property under a Will. A specific bequest is an identified piece or class of property. A general bequest is one that can be satisfied from the general assets of the Estate.

Bond: A guarantee by an insurance company or bonding agency to repay any loss due to negligence or criminal cause by a fiduciary, such as an Executor, Administrator, or Trustee. A Will or Revocable Trust can waive any bond requirement.

Bypass Trust: See Credit Shelter Trust

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C


Capital Gain: The profit reported to the IRS upon the sale of a capital asset. Capital gain is the difference between the tax basis of an asset and the net proceeds of the sale of the asset. If the asset is sold for a lower price than its acquisition cost, a capital loss may be reported.

Charitable Gift Annuity: A stream of income received by an individual when the individual makes a gift of property to a charity in exchange for the stream of income.

Charitable Deduction: A tax deduction for income tax, estate tax or gift tax purposes that may be available for transfers to charitable organizations.

Charitable Lead Trust (CLT): An irrevocable Trust with a fixed term naming a charity as the income recipient (annuity interest or unitrust interest) with the remainder passing to non-charitable beneficiaries.

Charitable Lead Annuity Trust (CLAT): . This is basically the opposite of the CRAT. Here the Settlor establishes a trust and names a charity to receive an annuity amount from the trust for a specified amount of time (the “initial term”). At the end of the initial term the remainder pays back to the Settlor or to other noncharitable beneficiaries named in the trust.

Charitable Lead Uni-Trust (CLUT): This is basically the opposite of the CRUT. Here the Settlor establishes a trust and names a charity to receive a percentage of the trust’s value for a specified amount of time (the “initial term”). At the end of the initial term the remainder pays back to the Settlor or to other noncharitable beneficiaries named in the trust.

Charitable Remainder Trust (CRT): A Trust providing an annuity or unitrust distribution to an individual (possibly including the Grantor) or individuals that will distribute the remainder to charity after the death of the individual or individuals.

Charitable Remainder Annuity Trust (CRAT): A Trust created to receive a gift of property, providing an annuity distribution to an individual (possibly including the Grantor) or individuals that will distribute the remainder of the property to charity at the death of the individual or individuals. The annuity is based on the initial value of the Trust and never changes.

Charitable Remainder Unitrust (CRUT): A Trust providing a unitrust distribution to an individual (possibly including the Grantor) or individuals that will distribute to charity after the death of the individual or individuals. The unitrust amount changes annually based on changes in the valuation of the Trust assets.

Circular 230 (IRS Circular 230): As part of an effort to curb abusive tax shelters, the Department of the Treasury and the IRS have issued final regulations under IRS Circular 230 to restore, promote, and maintain the public’s confidence in those individuals and firms who act as tax advisors.

Class Gift: A gift (by Will, Trust, or otherwise) to individuals who are defined by a common class description (e.g., “children” or “grandchildren”).

Clayton Election: This is a very popular method of determining the amount of a deceased spouse’s estate that will be set aside for the surviving spouse. The name is based on the case, Estate of Clayton v. Commissioner, 97 T.C. 327 (1991). It requires a trustee or personal representative to decide during the trust administration how big the marital deduction should be. The property set aside for the marital deduction gets transferred to the marital trust, which is set up as a QTIP trust. A 706 (Federal Estate Tax Return) is required to notify the IRS of the QTIP election and disclose the amounts going into the marital QTIP and bypass trusts. The Clayton election is a very flexible marital deduction planning tool and is most desirable for clients who have moderate to nearly-taxable estates, or in times of significant uncertainty in the estate tax.

Codicil: A written change to a Will. A codicil requires the same formality in its execution as a Will.

Community Property: Community property states (currently Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin) provide that a husband and wife each own a one-half interest in the other’s assets and earnings during the course of the marriage. States that do not have community property laws provide for separate property rights during the course of the marriage. In most community property states, the only separate property is that which is owned exclusively by one of the spouses prior to the marriage and never commingled with community property and assets received by gift or inherited at any time.

Conservator: An individual or institution appointed by the Court to administer the affairs of a disabled adult. In Illinois, such an individual is now referred to as a “Guardian.”

Constructive Trust: A Trust imposed by a court of equity in order to keep a just result without regard to the intention of the parties.

Contingent Interest: A future interest in property that is conditioned upon the happening or non-happening of a specified event; the interest may never become a vested interest.

Credit for Prior Transfers: A credit against the federal estate tax for the federal estate tax paid on another Estate.

Credit for State Death Taxes: A credit against the federal estate tax for death taxes paid to a state. This credit has been phased out. Beginning in 2005, a deduction in determining the federal estate tax is allowed.

Credit Shelter Amount: See exemption equivalent.

Credit Shelter Trust: A Trust designed to protect the applicable exclusion that each person may gift or bequeath to Beneficiaries. This is often referred to as a bypass Trust because the trust assets more or less bypass the taxable estate of the surviving spouse (they are not included in his/her estate). Still, the surviving spouse can have certain rights in the Trust during his/her lifetime. It also is referred to as the Family Trust in an A/B trust plan. See Family Trust.

Crummey Power or Crummey Withdrawal Right: Named after the taxpayer in the case of Crummey vs. Commissioner, it is the right of a Donor to make gifts to a Trust with a withdrawal right. The Donor or Trustee must notify the donee Beneficiary of the withdrawal rights as to some or all of the value of the gift in the year made. The right to withdraw – which is typically not exercised – is required for the gift to the Trust to be a gift of a present interest. This is necessary in order to qualify for the gift tax annual exclusion. Gifts of a future interest do not qualify for the gift tax annual exclusion.

Custodian: The person or organization managing assets for minor children or adults deemed incompetent.

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D


Decanting: This is the process by which a trustee exercises the power to distribute property from one trust (the “originating” trust or the “inception” trust) into a new trust for the benefit of a beneficiary. Decanting is an increasingly popular strategy to allow a trustee to create new, more favorable trust terms for a beneficiary. (A trustee can only exercise a decanting power consistent with the trustee’s fiduciary duties to the beneficiaries).

Deceased Spouse Unused Exemption Amount (DSUEA): This is the amount of AEA that is leftover after the estate plan has allocated part of a deceased spouse’s estate exemption to a bypass trust.

  • An example is easiest: Husband dies in 2015 and has $1,000,000 in his gross estate. His estate plan is designed in a way that allocates his AEA against that $1,000,000, causing that amount to be put into a bypass trust. Assuming he had made no other gifts that would reduce his AEA, after his estate plan goes into effect he has a remaining unused exclusion of $4,430,000 (his $5,430,000 AEA minus the $1,000,000 put into the bypass trust). His surviving wife now has her own AEA of $5,430,000 plus husband’s $4,430,000 DSUEA, for a combined estate tax exclusion of $9,860,000. (This oversimplified example also demonstrates a bit how portability works.)

Decedent: A person who has died, whether testate or intestate (that is, with or without a Will).

Declaration of Trust: See Living Trust.

Defective Grantor Trust: See Intentionally Defective Grantor Trust.

Defined Benefit Plan: An employer-provided retirement plan that guarantees an employee specified retirement income, usually based on a formula that takes years of service and salary level into account. A pension plan is a defined benefit plan.

Defined Contribution Plan: An employer-provided retirement plan that does not require the employer to contribute a stated dollar amount but instead ties contributions to the employer’s profit levels (usually based on a formula). A profit-sharing plan is a defined contribution plan.

Delaware Tax Trap (DTT): Refers to the process of exploiting the Rule Against Perpetuities (RAP) provision in a trust by allowing a beneficiary to exercise a limited power of appointment in a way that extends the original RAP in the trust. The upshot is that the person who exercises the power causes the property subject to the power to be included in their estate (getting a basis adjustment) when they die. The DTT “loophole” is found in IRC sec. 2041(a)(3) when someone who holds a limited power of appointment exercises it in a way that “…postpone[s] the vesting of any estate or interest… or suspend[s] the absolute ownership or power of alienation of [the interest]… for a period ascertainable without regard to the date of the creation of the power.” This is a complicated way of saying that, if someone who holds a limited power of appointment exercises that power to give someone else a presently-exercisable general power of appointment (referred to as a “PEG” power), the person who exercised the limited power of appointment will have estate inclusion over the property for which the PEG power was granted to the other person. Effectively drafting for the DTT often requires modifying a trust’s RAP clause and carving out any limitation that would otherwise prevent the exercise of a limited power of appointment this way. It also requires the draft person to not rely on the state’s governing RAP statute, as most states have savings language to prevent “accidentally” triggering inclusion through a DTT.

Descendant: A person in the direct line of descent, such as a child or grandchild. Also referred to as a “lineal descendant.”

Devise: A gift of real property under a Will. A “specific devise” is an identified piece or class of real property.

DING / NING / WING: Delaware / Nevada / Wyoming Incomplete Non-Grantor Trust. This is an irrevocable trust that works primarily as an income tax / capital gains tax strategy. The trust is set up in a state that does not impose state income tax so any highly-appreciated assets sold by the trust will avoid state capital gains tax. Any assets remaining in the trust when the client dies will be included in the client’s gross estate, causing a step-up in basis for those assets.

Disclaimer: The refusal to accept an inheritance. A person inheriting assets can refuse to accept any or all of those assets. An effective disclaimer is governed by strict state and federal laws. Among other things, a disclaimer must be in writing and made within nine months of a person’s death.

Domestic Trust: A Trust with one or more U.S. persons having control (the control test) over all substantial decisions (including distribution or investment decisions and powers to remove, add, or replace Trustees) and over the administration of which a court within the U.S. (the court test) is able to exercise primary supervision. A Trust is presumed to meet the court test if the Trust does not direct administration outside the U.S., the Trust is administered exclusively in the U.S., and the Trust is not subject to an automatic migration provision.

Domicile: An individual’s permanent legal and intended home. A person can have only one domicile though residing in several locations. An individual’s domicile determines the appropriate taxing and probate jurisdictions.

Donee: The person to whom a gift is given.

Donor: The person making a gift.

Durable Power of Attorney for Health Care: A document allowing an Agent to direct a person’s health care decisions if the person is unable to do so, thereby avoiding a Guardianship of the person. As with the Durable Power of Attorney for Property, it is durable because, unlike an ordinary power of attorney, it survives the Principal‘s incapacity. The Illinois Power of Attorney Act was amended effective July 1, 2011.

Durable Power of Attorney for Property: A document in which a person (the Principal) grants an Agent the authority to handle financial matters on his or her behalf. The document is used to avoid a financial Guardianship proceeding in court. it is durable because, unlike an ordinary Power of Attorney, it survives the Principal’s incapacity, but terminates at the Principal’s death.  The Illinois Power of Attorney Act was amended effective July 1, 2011.

Dynasty Trust: A Trust that lasts until terminated by the Rule Against Perpetuities or, potentially, forever if a jurisdiction does not have a Rule Against Perpetuities.

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E


Equitable Apportionment: A legal doctrine that requires the recipients of Probate and non-Probate assets to pay their proportionate share of death taxes and administration expenses. Provisions in the Will can overrule this doctrine.

Escheat: The process by which assets of a person who dies intestate (without a Will), and without heirs, go to the state.

Estate Freeze: Any of a number of estate planning techniques typically used to prevent the value of an owner’s interest in a business or other asset from increasing after the technique is implemented. An estate freeze is often used to prevent estate tax liabilities from increasing as property values increase.

Estate Tax: A transfer tax that the federal government and some states assess on the right to transfer assets to others at death. The estate tax is sometimes referred to as the death tax or, incorrectly, as inheritance tax. The top rate in 2013 is 40 percent, which is, in effect, a flat rate, since there is an applicable exclusion for taxes at lower rates.

Executor: The individual or institution named in a Will who is responsible for management of assets, payment of debts and taxes, and ultimate transfer of the property passing under the Will. Multiple Executors can act together as co-Executors. The Executor is referred to in some states as a Personal Representative.

Exemption Equivalent: The amount that can pass estate tax free at death. Under the American Taxpayer Relief Act of 2012, that amount is now set permanently at $5 million, indexed for inflation ($5.25 million in 2013). For gift tax purposes, the law provides for an exemption equivalent equal to the estate tax exemption amount. The gift and estate tax exclusions are “unified.”

Express Trust: A Trust established by a written instrument or by an oral agreement of the parties. Compare to Constructive Trust or Resulting Trust.

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Family Limited Partnership (FLP): A device used to provide control and management of assets and transfer property interests among family members, and also sometimes to obtain valuation discounts for estate tax purposes. A general partner controls the entity; limited partners are treated as mere investors, with no rights to control the entity or its investments, nor to dictate any of its affairs.

Family Trust: See Credit Shelter Trust.

Fiduciary: A person in a position of trust and responsibility, subject to heightened legal and ethical standards including, among others, Trustees, Executors, Guardians and Agents.

“Five and Five” Power: A non-cumulative general power of appointment giving the power holder the right to withdraw the greater of $5,000 or five percent of a Trust share. By specific exception under the estate and gift tax provisions of the Internal Revenue Code, the lapse of such power has no gift or estate tax consequences (except for the year in which the power holder dies).

Flip Charitable Remainder Unitrust: A Net Income Charitable Remainder Unitrust that converts to a regular Charitable Remainder Unitrust upon the happening of an event (e.g., the sale of a non-marketable asset, the attainment of a defined age, or the retirement of a Beneficiary).

Foreign Asset Protection Trust (FAPT): This is more advanced form of asset protection trust that is established under the laws of a foreign country that has even more favorable asset protection for clients. Nevis, the Cook Islands, Jersey, Guernsey, and other remote countries are popular choices.

Foreign Tax Credit: A credit against the federal estate tax for death taxes paid to a foreign nation.

Foreign trust: A Trust that is not a Domestic Trust.

Form 706: The federal estate tax return.

Form 709: The federal gift tax return.

Form 1040: The federal individual income tax return.

Form 1041: The federal fiduciary (Trust or estate) income tax return.

Fractional Marital Formula: A formula that determines the amount of property passing to a Marital Trust as a fraction of all the assets. See pecuniary marital formula.

Funding: The process of transferring ownership of individually-owned assets from the Grantor to his or her Trust.

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General Power of Appointment: A power to appoint property to anyone, including the appointer or the appointer’s estate or the creditors of either.

General Power of Appointment Marital Trust: A type of Marital Trust over which the surviving spouse can have the most control. The surviving spouse must receive the income and must have a lifetime or testamentary General Power of Appointment.

Generation-Skipping Transfer Tax (GSTT): A tax in addition to the estate tax or gift tax imposed when property passes to a Beneficiary more than one generation removed from the generation of the Donor or the Decedent (e.g., a grandchild). Each taxpayer is entitled to a $5 million exemption ($5.25 million in 2013, indexed for inflation). Language allocating the $5.25 million exemption from the tax can be included in a Generation-Skipping Transfer Tax Exempt Trust or Will.

Generation-Skipping Transfer Tax-Exempt Trust (GSTT Exempt Trust): A Trust that usually benefits multiple generations and is not subject to the GST Tax because the GSTT exemption was allocated to it and it was initially equal to or less than the GSTT exemption. The term also applies to a Trust grandfathered from the application of the GST Tax. A GSTT Trust is not subject to estate tax when a Beneficiary dies.

Generation-Skipping Transfer Tax Exemption (GSTT Exemption): The value of property that can be set aside for a Beneficiary more than one generation removed from the Donor‘s or the Decedent‘s generation (e.g., a grandchild) without the imposition of the tax. The GSTT exemption is the same as the exemption from federal estate tax, i.e., $5 million, indexed for inflation ($5.25 million in 2013).

Gift: A voluntary transfer of property to another person made without receiving something of equal value in return. A completed gift, which removes an asset from a Donor‘s estate, must be of a present interest and without any conditions. The federal government will assess a gift tax when the value of the gift exceeds the annual exclusion and the applicable exclusion amount is exhausted.

Gift Tax: A tax imposed on transfers of property by gift during the Donor‘s lifetime.

Gift Tax Annual Exclusion: A gift that is not considered a taxable gift. The law permits the exclusion each year of the first $14,000 in gifts made to any one Donee; married couples may jointly give up to $28,000 to any one Donee tax free. There is no limit to the number of Donees to whom the Donor may make gifts in any year. In addition to the $14,000 gifts, the exclusion also includes direct payments of tuition and medical care expenses. The term generally applies to outright gifts and transfers under a Uniform Transfers to Minors Act but also gifts in trust in limited circumstances. The Donor of a §529 Plan may use five years of annual exclusion amounts in one year.

Grantor: The person who establishes a Trust. Also called the Trustor, Settlor, or Donor.

Grantor Deemed Owner Trust (GDOT): This is just an alternative name for the IDGT or IDIT; it’s really the same thing. The grantor (the individual who sets up and puts property into the trust) is deemed to be the owner of the trust for income tax purposes, but the value of the trust property is not included in that person’s gross estate when they later die.

Grantor Retained Annuity Trust (GRAT): An irrevocable Trust in which the Grantor retains a specific annuity for a period of years.

Grantor Retained Income Trust (GRIT): A GRIT is similar to a GRAT except that the Settlor receives the income stream from the trust assets, rather than a fixed annuity amount from the trust for a specified period of time. After the initial term ends the GRIT pays to other beneficiaries.

Grantor Retained Unitrust (GRUT): An irrevocable Trust in which the Grantor retains a unitrust interest for a period of years.

Grantor Trust: A Trust in which the Grantor retains control of the assets or income. The income from a Grantor Trust is taxable to the Grantor rather than to the Beneficiary, although the Grantor and Beneficiary may be one and the same See Intentionally Defective Grantor Trust.

Gross Estate: All property subject to estate tax in the Decedent‘s estate (e.g., Probate property, joint tenancy property (only one half if between spouses), land Trusts, Revocable Trusts, death benefit of life insurance owned by the decedent, profit-sharing plans, IRAs, 401(k) plans) regardless of whether the property qualifies for a marital deduction or a charitable deduction.

Guardian of the Estate: An individual or institution legally responsible for the management of the assets of a minor or disabled adult. The Guardian is appointed by the Court and is under its supervision.

Guardian of the Person: An individual or institution legally responsible for the care and well-being of a minor or disabled adult. The Guardian is appointed by the Court and is under its supervision.

Guardianship: The Probate Court process of administration or management of the property or person of a minor child or an incompetent adult, a type of living Probate. Guardianships of incompetent adults can generally be avoided though the use of Trusts and Durable Powers of Attorney if signed while the person is still competent.

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H


Hanging power: Generally, a Crummey power that lapses gradually over a period of years.

Heir: Heirs are the persons who take a decedent‘s property if the decedent does not have a will. State law dictates who the heirs of a decedent are.

Health Insurance Portability and Accountability Act (HIPAA): Pronounced “Hippa,” this is the common name given to a federal law, one of the purposes of which is to protect a person’s health information by requiring a written authorization before any information, including medical records, can be divulged. A HIPAA Authorization complies with the provisions of the Act and names those individuals who are authorized by the patient to access such medical information.

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Incidents of ownership: Any element of control or ownership rights in property (often applied to insurance policies; i.e., to remove insurance from a gross estate for estate tax purposes, you must give up all incidents of ownership and live at least three years).

Income beneficiary: A person or persons currently entitled to the income of a trust (including persons entitled to income at the discretion of the trustee).

Income in respect of a decedent (IRD): Property of an estate that, if collected by the decedent before he or she died, would have been subject to income tax (e.g., insurance commissions, payments under an installment sale, or profit-sharing proceeds, IRA benefits).

Incompetence: The inability of a person to function and take care of his or her own affairs, sometimes referred to as a legal disability or incapacity.

Inheritance tax: A tax levied by a local government (usually a state) on property that is inherited. The amount of tax relates to each inheritance received rather than the total size of the decedent‘s estate. Tax rates usually depend on (a) the relationship of the beneficiary to the decedent and (b) the total value of the bequest received by the beneficiary. An inheritance tax is imposed on the heir rather than on the estate, as in the case of an estate tax.

Intangible property: personal property that is representative of other rights (e.g., stock in a corporation, bank accounts, interests in a partnership even if the partnership owns real estate, or a beneficial interest in a land trust) as contrasted with personal property that can be touched or otherwise perceived by the senses.

Intentionally Defective Grantor Trust (IDGT): Income-tax-shifting trusts in which a grantor irrevocably transfers assets, usually by partial gift and partial sale, out of his estate, but still pays the income taxes on earnings and capital gains, even though paid to the beneficiaries.

Intentionally Deficient (or Defective) Irrevocable Trust, or Income Defective Irrevocable Trust (IDIT): Just one more acronym for an IDGT or GDOT; all these are synonymous. Their usage is simply a matter of the professional’s preference.

Intestacy law: A state law that governs the distribution of an individual’s estate when the individual does not have a will or the will does not completely dispose of the assets (or the individual does not dispose of the property in another manner, e.g., revocable trust, beneficiary designation, or joint tenancy).

Intestate: A term used to describe the probate estate of an individual who has not made a valid will. When a person dies intestate, the probate court, following state intestacy laws, will determine who is to receive the assets, act as administrator, and act as guardian for minor children.

Inventory: A list of all assets contained in a probate estate. A probate estate inventory is a matter of public record, available for examination by anyone who cares to ask for it.

Irrevocable trust: A trust that cannot be amended or revoked by its grantor(s). Like corporations, these are separate tax entities. Irrevocable trusts are often used in estate planning to place assets outside of someone’s estate. One of the most common types of irrevocable trust is the irrevocable life insurance trust (ILIT).

Irrevocable Life Insurance Trust (ILIT): An irrevocable trust established for the purpose of owning life insurance and excluding its proceeds from the estate of the insured (and the insured’s spouse if married) for estate tax purposes.

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J


Joint tenancy (with right of survivorship)(JTWROS): A form of joint ownership in which the death of one joint owner results in the immediate transfer, by operation of law, of ownership to the surviving joint owner. Joint tenancy property is not subject to probate. Compare with tenancy in common.

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K


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L


Lapse: The termination of a right or a power usually due to inaction on the part of the person holding the right or the power.

Legacy: Property transferred by your will.

Legatee: A person receiving a legacy.

Letters testamentary: Term used in some jurisdictions to refer to the legal document that provides the proper authority for an executor to act for the estate of a deceased person. Also referred to as Letters of Office.”

Life estate: An interest in property limited to use during a person’s life or the life of another.

Limited power of appointment: See Special power of appointment.

Liquid assets: Cash or equivalent assets that can be readily converted into cash without any serious loss. Examples would be cash, Treasury bills, money market fund shares, and certificates of deposit.

Living (inter vivos) Trust: A trust that is created during the lifetime of the grantor and may be amended or revoked by the grantor during the grantor‘s lifetime. It will usually be used as the ultimate vehicle for the distribution of the grantor‘s assets when the grantor dies. Also known as a revocable trust.

Living Will: A statement of philosophy concerning your desire for treatment in the case of terminal illness, if the procedures in question are only going to delay the dying process. The Living Will is superseded by a validly executed the Durable Power of Attorney for Health Care.

Lump-sum distribution: A payment made from a “tax-advantaged” retirement plan that is made in one payment rather than in installments.

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M


Marital deduction: A deduction that is available for transfers between spouses, either during lifetime or at death. Such transfers are exempt from gift and estate tax but the assets transferred are subject to estate tax in the estate of the surviving spouse. The deduction is not applicable if the donee spouse is not a U.S. citizen. See Qualified Domestic Trust.

Marital / Family Trust plan: An estate plan that divides property between two trusts – one trust equal to the exemption equivalent that is not subject to estate tax at the surviving spouse’s death, and another trust that qualifies for the marital deduction. Also called an A/B Trust Plan.

Marital / Non-marital Trust plan: See Marital / Family Trust plan.

Marital property: In Illinois (and most other states), property that arises during marriage other than property received by gift or inheritance. The concept applies in dissolution of a marriage and does not govern the disposition of property at death.

Marital / Residuary Trust plan: See Marital / Family Trust plan.

Marital Trust: A trust that qualifies for the unlimited marital deduction for federal estate tax purposes.

Maximum marital deduction: The maximum marital deduction allowed; since 1982, is equal to all of a decedent‘s gross estate.

Merger of title: Occurs when all beneficial interests in an asset (such as a life estate and a remainder) become simultaneously owned by the same person or persons, resulting in the owners holding a 100-percent interest in the asset.

Minor: A person who has not reached the age of majority (legal age); in most states, the age of majority is 18.

Minority discount: A discount allowed when valuing an asset that is not publicly traded; the discount is allowed because of a lack of liquidity and/or lack of control.

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N


Natural guardian: A person who has a natural right to guardianship of a minor child because of a parental relationship.

Net Income Charitable Remainder Unitrust (NICRUT): A trust from which the individual or individuals receive the lesser of the net income or the unitrust amount. See Charitable Remainder Trust.

Net Income Makeup Charitable Remainder Unitrust (NIMCRUT): A trust from which the individual or individuals receive the lesser of the net income or the unitrust amount, but if income ever exceeds the unitrust amount, the excess income can be used to make up for years in which the net income was less than the unitrust amount. See Charitable Remainder Trust.

Next of kin: Historically, referred to as takers of personal property. See heirs.

No-contest clause: A clause in some wills and trusts that purports to disinherit any person attempting to attack the validity of the will or trust.

Non-ascertainable standard: A power granted to a trustee to use income or principal for the benefit of a trust beneficiary for his or hercomfort, welfare, best interests, or happiness. Using such a standard has estate tax consequences. See ascertainable standard.

Non-marital property: In Illinois (and in most other states), all property that is not marital property.

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O


OBRA trust: A trust established for and containing the assets of a disabled individual created before the disabled individual attains age 65 by the individual’s parent, grandparent, legal guardian or a court, and making the beneficiary eligible for state aid (Medicaid) without exhaustion of the trust assets. The trust must provide that the state will recover any money paid to the disabled individual (to the extent of trust assets) at the death of the individual. The trustee may use trust assets for the beneficiary for items beyond what the state provides for the disabled individual.

OBIT: The “Optimal Basis Increase and Income Tax Efficiency Trust” is a form of trust that includes elaborate formula language granting testamentary or lifetime powers of appointment to strategically cause assets to be included in a decedent’s gross estate. The formula language is designed in a way that prioritizes estate inclusion for assets with low basis in order to ensure assets get a step-up, and not a step-down in basis when the power holder dies, and includes protective language to cause inclusion up to the decedent’s AEA. Rather than describe a specific type of trust, OBIT describes the estate tax inclusion nature of a trust designed to cause assets in the trust to receive a step-up in basis when a beneficiary holding a power of appointment dies.  For additional information please see the outline, “The Optimal Basis Increase and Income Tax Efficiency Trust,” by Edwin P. Morrow, III, JD, LL.M (tax)

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Payable-on-death (POD) account: A deposit of money in a bank or brokerage account in one’s own name with a designated beneficiary. The account creator/owner owns and controls the account without restriction during his or her life. At the death of the account creator/owner, the beneficiary becomes the account owner. Also referred to as a transfer-on-death (TOD) account. The owner’s agent under a Power of Attorney may, however, not be able to access or control such an account, since it is considered to be a “trust,” and therefore beyond the authority of a Power of Attorney, unless the account is expressly included within the terms of the Power of Attorney.

Pecuniary bequest: A bequest, in any form, of a specific amount of money. The amount may be determined by formula, but the specific dollar amount must be determined with only one result.

Pecuniary legacy: A gift of money made by Will.

Pecuniary marital formula: A formula that determines the exact dollar amount of property to be allocated to a marital trust. See fractional marital formula.

Per capita: A distribution made equally to a number of persons without regard to generation. A distribution to “all my descendants equally and per capita” would result in children, grandchildren, and great-grandchildren each receiving the same amount. This is generally a less prevalent distribution pattern than a per stirpes distribution.

Perpetuities, Rule Against: See Rule Against Perpetuities.

Personal representative: Another name for an executor or administrator.

Per stirpes: Latin for “by the branch,” a distribution to members of a multi-generational group (descendants) with members of a younger generation taking only if their parent is deceased. For example, X has three children, A, B, and C; if all three are living, they take equally; if A is deceased and has two children, A‘s two children split the share A would have taken if living; if A is deceased and has no descendants, B and C take the property equally.

Portability: The concept of portability allows married couples to effectively combine their individual AEAs, allowing them to pass up to $10,000,000 (adjusted for inflation) to their heirs. If a spouse dies and doesn’t use all of his or her AEA in their estate plan, the amount they don’t use is called the DSUEA, and the surviving spouse is allowed to use that amount in their own estate tax planning. In order to take advantage of portability the trustee of the deceased spouse’s estate must file a federal estate tax return to claim.

Posthumous child: A child born after his or her father’s death. Compare to after-born child.

Pour-Over RLT: There’s a temptation to think the pour-over RLT works like a pour-over will, but it’s actually quite different. It’s designed generally for couples in blended families who live in a community property state (see that definition) and where the couple’s planning objectives are really different from each other. The couple will establish a joint RLT to hold their community property or other jointly-owned property, and they will each establish a separate RLT to hold their separate property. When the first of that couple dies, the joint RLT terminates and “pours over” the joint RLT assets into the separate trusts. Those separate trusts then manage the distribution of the property.

Pour-Over Will: A Will that is used in conjunction with a Living Trust to “pour over” any assets to the Trust that are not transferred to the Trust prior to death.

Power of appointment: The right to transfer or dispose of property not owned by the power holder, such as assets in a trust created by someone else. If estate-tax planning is involved, care must be taken that the power is not a general power of appointment, in which case the assets subject to the power may unintentionally be included in the estate of the person who has the power. Compare to a Special power of appointment.

Power of Appointment Support Trust (POAST): This acronym refers to the “Power of Appointment Support Trust,” a strategy discussed in the December 2015 issue of Trusts & Estates magazine. The purpose of the POAST is to allow multiple generations to leverage AEA and GSTT exemptions to accelerate a basis adjustment in appreciated assets by triggering inclusion in the estate of a senior generation by granting that older generation a general power of appointment. A wealthy client establishes a trust for the client’s parent and includes a formula general power of appointment to trigger estate inclusion up to (but not over) the parent generation’s AEA & GSTT. When that parent generation dies the assets subject to the power get a basis step up, and the assets continue in trust for the benefit of the original client (settlor) and their descendants in a DAPT structure. An additional option would be to include a “hybrid” DAPT structure that allows a trust protector to add the settlor as a possible discretionary beneficiary at a later time.

Power of attorney: A written instrument created by the principal, authorizing an agent (sometimes called the “attorney-in-fact”) to act on behalf of the person who signed the instrument (the principal). If the agent is authorized to act in all matters, the agent has a general power of attorney. If the authority granted in the instrument is not affected by the disability of the principal, the agent holds a durable power of attorney. If the agent’s powers become effective only upon the happening of an event described in the instrument, the agent holds a springing power of attorney.  See also Durable Power of Attorney for Property and Durable Power of Attorney for Health Care.

Precatory language: Suggestive language in a will or trust that expresses the sentiments or preferences of the person preparing the will or trust, but is not binding.

Predeceased ancestor rule (or predeceased child rule): In generation-skipping, when the parent of the taker who is a descendant of the transferor is not living at the time of the transfer, the taker is placed in the generation of the deceased ancestor. The rule can apply to collateral heirs such as grandnieces and grandnephews if the transferor has no living descendants.

Presently-Exercisable General Power of Appointment (PEG Power): is a power that can be immediately exercised by the power holder to appoint property to that person’s self, their estate, their creditors, or the creditors of their estate. Possession of a PEG power causes the value of the property over which the power may be exercised to be included in the power holder’s estate. PEG powers are used in many contexts, including the application of the Delaware Tax Trap (DTT)

Pretermitted child: A child born after a parent has executed a will (a) who is not provided for in the parent’s will and (b) whose exclusion from the will is not expressly provided for in the will itself.

Principal: (1) The assets that make up a trust, sometimes referred to as the corpus. Many trusts provide for separate treatment of principal as opposed to income derived from the principal. (2) A person who gives authority for someone else to act on his or her behalf, i.e., the person making a power of attorney.

Private annuity: A transaction in which an individual sells property to another individual, corporation (other than a company in the business of issuing annuities), trust, or partnership in exchange for an annuity.

Private foundation: Typically, a charitable trust or not-for-profit corporation that makes gifts to operating charities. Often controlled by the individual (or members of the individual’s family) establishing the foundation. gifts to private foundations will usually qualify for a charitable deduction, for income tax, gift tax, or estate tax purposes.

Probate: The process of legally validating a will or intestate estate. It involves collecting assets, paying bills, and eventually changing title to the assets, with or without the supervision of the probate court, depending upon certain provisions under the will. In Illinois, estate having a gross value under $100,000 may avoid formal probate through the use of a Small Estate Affidavit.

Probate estate: Property that passes under a decedent’s will (or as directed by law under the intestacy statute if the decedent died without a will). Applies only to assets in the individual name of the decedent, and not to joint tenancy assets (which transfer to the surviving joint tenant by operation of law) nor to assets that have a beneficiary designation (which transfer to the named beneficiary by operation of law).

Property power (Power of Attorney for Property): A power of attorney that grants the agent the power to act with respect to the principal‘s property.

Prudent Investor Rule: The contemporary version of the Prudent Man Rule. It signifies the standard to be applied to a fiduciary, such as a trustee, requiring the fiduciary to invest and manage all assets as would a prudent investor under like circumstances, taking into account risk management and investment diversification.

Prudent Man Rule: An older standard to be applied to fiduciaries, requiring the fiduciary to invest and manage all funds as would a prudent man under like circumstances. Replaced by the Prudent Investor Rule.

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Qualified Domestic Trust (QDOT): Special language that must be a part of the marital trust portion of a revocable trust if the surviving spouse is not a U.S. citizen. Not available for lifetime gifts.

Qualified perpetual trust: A trust under Illinois law that is not subject to the Rule Against Perpetuities.

Qualified Personal Residence Trust (QPRT): A trust funded with the grantor‘s residence and/or vacation residence that, after a term of years in which the grantor retains the right to live in the home rent free, will pass to the remaindermen.

Qualified Subchapter-S Trust (QSST): A trust that contains special provisions to enable it to own Subchapter-S stock.

Qualified Terminable Interest Property (QTIP) Trust: A type of marital trust that qualifies for the unlimited marital deduction, but does not give the surviving spouse a general power of appointment. QTIP Trusts limit the rights of the surviving spouse in such a way that the assets are preserved for a different beneficiary at the surviving spouse’s subsequent death. As with any marital trust, the surviving spouse must receive all of the trust‘s income during his or her lifetime. The surviving spouse may, but need not, also receive principal distributions. This can be especially useful in the case of a second marriage where the grantor wishes to protect the children from the first marriage while benefiting the surviving spouse during his or her lifetime.

Quasi-community property: In California, property of a married couple moving to California from a common law state that, upon dissolution of marriage or death, will be considered community property.

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Remainder: The assets remaining in an estate for a beneficiary or heir, after an income or other temporary interest has ended.

Remainderman: A person entitled to principal at the death of an income beneficiary.

Residuary estate: The assets remaining in an estate after all specific transfers of property are made and all expenses are paid. When a pour-over will is used, the residuary is transferred to a trust.

Resulting trust: A trust resulting in law because of the acts of parties regardless of any intent to create a trust. Compare express trust and constructive trust.

Re-titling: (1) The process that legally transfers ownership of property from the grantor to a trust. (2) In probate, the process of transferring ownership of assets from the decedent to the heirs or beneficiaries under the court’s supervision. See Funding.

Revocable Living Trust: See Living Trust.

Right of representation: See per stirpes.

Rollover IRA: An IRA that is allowed to accept unlimited transfers because the contribution is coming from another IRA or an employer’s qualified retirement plan.

Rule Against Perpetuities: A common-law principle that states that a trust interest must vest not more than “twenty-one years plus a life in being.” (Check out the movie Body Heat, in which William Hurt’s character is tripped up by the rule.) In recent years, some states have abolished the rule while others, such as Illinois, have enacted laws enabling people to opt out of the rule.

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Second-to-die insurance: See survivorship insurance.

Section 529 Plan:. An investment in which earnings withdrawn for education are not subject to income tax; otherwise, earnings withdrawn are subject to income tax plus a ten-percent penalty. The donor designates a beneficiary, but remains in control of the use of funds and can take property back (subject to income tax and applicable penalties). Not includable in the donor‘s estate for federal estate tax purposes, except under limited circumstances.

Section 2503(c) Trust: An irrevocable trust established for minor children. gifts to such trusts are deemed to be gifts of a present interest and thus can qualify for the annual $12,000 gift-tax exclusion. The trustee manages the trust assets and, at his or her discretion, may distribute income or principal to a beneficiary until the beneficiary reaches age twenty-one. At that point, the beneficiary is entitled to the trust assets.

Section 6166 election: An election to defer payment of estate tax attributable to operating business interests when certain tests are met.

Self-canceling installment note (SCIN): An installment note that is cancelled upon the death of the person who made the loan.

Self-declaration of trust: A type of revocable trust in which the grantor is also the trustee and therefore controls the assets of the trust.

Separate property: In community property states, all property that is not community property.

Short-term guardian: A guardian appointed by an acting guardian to take over the acting guardian’s duties each time the acting guardian is unavailable or unable to carry out those duties. Appointment cannot exceed a cumulative 60 days within a 12-month period.

Special Needs Trust: A trust for a third-party beneficiary who may receive state assistance. The trustee may use assets for the beneficiary‘s needs beyond what the state will provide, and the state is not entitled to reimbursement at the beneficiary‘s death. Also referred to as a “Supplemental Needs Trust.”

Special power of appointment: A power to appoint property to anyone other than the appointer or the appointer’s estate or the creditors of either, usually to a defined group such as “descendants and their spouses.”

Specific bequest: A gift by will of a specific amount of money or specific items of tangible personal property or intangible property.

Spendthrift provision: A clause in a trust that prevents a beneficiary from spending or encumbering an inheritance without restraint and also may prevent creditors from reaching the beneficiary‘s interest in the trust.

Spendthrift trust: A trust that is not subject to the claims of a beneficiary‘s creditors. Generally, the term does not refer to a trust established by a grantor for the benefit of the grantor. See also Asset Protection Trust.

Sprinkling or Spray Trust: A trust with provisions giving the trustee the discretion to distribute any or all of the income or principal among beneficiaries equally or unequally.

Standalone Retirement Trust (SRT): This is a special type of trust designed to receive “qualified retirement accounts” like IRAs, 401(k)s, etc. It can be set up as either revocable or irrevocable, and it’s designed to allow trust beneficiaries to continue to defer income tax on the account balance for as long as possible. (This is referred to as a “stretch out.”) SRTs also provide a lot of protection for retirement account balances after they’re inherited by beneficiaries. The SRT gained great relevance in 2014 following the Clark v. Rameker case.

Stand-by guardian: A guardian designated by an acting guardian to be appointed as guardian by the court when the acting guardian can no longer act.

Standard Charitable Remainder Trust (SCRUT): Used as a type of CRT. A standard charitable remainder unitrust Trust (SCRUT) pays an annual “Uni Amount” to the Recipient(s). The Uni Amount is a fixed percentage of the value of the trust assets at the beginning of the trust’s tax year. Because the Uni Amount is a percentage of the value of the trust assets at the beginning of the trust’s tax year the annual amount distributed to the Recipient(s) will vary with variations in the value of the value of the trust. Additional contributions may be made to a standard charitable remainder unitrust if that option is selected.

Stepped-up basis: The rule that makes an heir‘s or beneficiary‘s cost basis equal to the value of the asset at the date of the grantor‘s death – or, alternatively, six months later – rather than its original cost. If a gift of an appreciated asset is made during the donor‘s lifetime, the donee takes the donor‘s original cost basis and there is no step-up in the basis. The step-up avoids a capital gains tax on the appreciation that occurred during the donor‘s lifetime. The step-up rule is scheduled to end in 2010, but could be brought back the following year by the Sunset provision of the Tax Relief Act of 2001.

Subchapter-S Corporation: A corporation whose income is taxed to its shareholders, thus avoiding a corporate tax. Only certain trusts may own Subchapter-S stock. See Qualified Subchapter-S Trust.

Subchapter-S stock: Stock in a Subchapter-S Corporation.

Successor Trustee: The trustee appointed to act in the event the initial trustee is unable or unwilling to act.

Sunset provision: A provision in a law that ends the law at a certain date as if the law never existed. The Tax Relief Act of 2001 contains a Sunset provision that activates after the year 2010, eliminating the repeal of the estate tax.

Supplemental Needs Trust: See Special Needs Trust.

Survivorship insurance: A life-insurance policy that insures a couple instead of an individual. Such a policy can be much less expensive than an individual insurance policy. Its purpose is usually to pay the estate taxes that arise after the death of the surviving spouse and is most useful where the decedent‘s assets are predominantly illiquid, such as real estate or a family corporation. In order to be properly utilized, the policy should be held outside the insureds’ estates, possibly in an irrevocable life insurance trust (ILIT). Also commonly referred to as second-to-die insurance.

Survivor’s Trust: This term only applies in the context of a joint RLT plan. The survivor’s trust is the surviving spouse’s share of the joint trust property, plus any separate property the surviving spouse had. The deceased spouse’s property will typically flow into the marital and/or bypass trusts. The survivor’s trust is fully revocable by the surviving spouse for the remainder of the survivor’s life. It’s treated just as if the surviving spouse had established his or her own individual RLT.

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Tangible personal property: Movable property such as jewelry, clothing, furniture, automobiles, etc., as opposed to real property (land and buildings) or intangibles such as stocks, bonds, and bank accounts.

Temporary guardian: A guardian appointed on a temporary basis, usually pending the appointment of a permanent guardian, upon a showing of necessity for the immediate welfare and protection of an alleged disabled person.

Tenancy by the entirety: A special form of joint ownership between spouses that, upon the death of one spouse, results in the immediate transfer of ownership to the surviving spouse. In Illinois, it is limited to a couple’s primary residence, or homestead. It is not subject to the claims of a creditor unless the creditor is a creditor of both spouses.

Tenancy in common: A form of ownership in which two or more persons own the same property. At the death of a tenant in common, the decedent‘s interest passes according to the decedent‘s will, or by intestacy laws if there is no will, not to the other owner (unless the decedent‘s will so provides). Different types of entities may be tenants in common. If the tenant in common who dies is an individual, there may be a need for probate. Property also may be owned by more than one trust as tenants in common.

Terminable interest: Any interest in property that terminates upon the death of the holder or upon the happening of some other specified event.

Testamentary capacity: The mental ability to make a valid will. In Illinois, the person executing the will must be of sufficient mind and memory to understand the nature of the business at hand, know the natural objects of his or her bounty, and the character and extent of his or her property, and to make disposition of said property according to a plan formed in his or her own mind.

Testamentary trust: A Trust created by a Living Trust or a Will that takes effect only after death.

Testate: A term used to describe the estate of an individual who has left a valid will.

Testator: An individual who creates and executes a valid Will.

Total return trust: A Trust that can invest without regard to whether the return is from income or capital appreciation.

TottenTrust: A Trust created by a deposit of money in a bank account in one’s own name as Trustee for another. The account creator/trustee/owner owns and controls the account without restriction during his or her life. At the death of the Trustee, a presumption arises that an absolute trust was created for the beneficiary for the account balance at the death of the Trustee.

Transfer-on-death (TOD) account: A form of registration for securities that operates in the same fashion as a Totten Trust. See also Payable on death (POD) account.

Trust: A legal arrangement in which one person (the grantor) transfers legal title of property to another person (the trustee) to manage the property for the benefit of a third person or a charity (the beneficiary).

Trust Advisor: Many attorneys use this term interchangeably with Trust Protector. Whether those terms are truly synonymous is open to question, and is still an evolving issue under the law.
·         Investment Advisor: This is a Trust Advisor whose role is limited to advising the trustee on the kinds of assets to invest in.
·         Distribution Advisor: This is a Trust Advisor whose role is limited to advising the trustee on when to make or withhold distributions from the trust.

Trust Protector: This is a special type of power holder who can control certain aspects of irrevocable trusts. There is little consensus among attorneys as to what the protector can and cannot do, whether they serve in a fiduciary or nonfiduciary capacity, who should be the trust protector, etc.

Trustee: An individual or institution that manages property according to the instructions in a trust agreement.

Section 2032A election: An election to reduce the value of real property (either farm property or real estate used in business) for federal estate tax purposes when certain tests are met.

Two-trust plan: See Marital / Family Trust plan.

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Undivided interest: A type of interest held in property in which the property is titled among parties as joint tenants or as tenants in common. No owner has the right to exclusive use or control of any particular piece or fraction of the property; rather, each owner has an equal right with all of the other owners to use and enjoy 100% of the property.

Unified credit: A tax credit applied to gift or estate taxes. The Taxpayer Relief Act of 2001 changed the terminology to applicable exclusion amount, since the estate tax and gift tax were not unified under that Act. Transfers at death were treated differently from gifts after 2003 until 2013, when the American Taxpayer Relief Act of 2012 re-unified the gift and estate tax credit at $5 million, adjusted for inflation. See also applicable credit amount.

Uniform Transfers to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA): Statutory provisions allowing for transfer of property to a minor with a custodian named to act on behalf of the minor without having to be appointed as the minor’s guardian. UTMA assets are treated as owned by the minor for income and other tax purposes. It is simple to set up, but less flexible than a Section 2503(c) trust or Crummey trust.

Uniform Trust Code (UTC): This is a body of law drafted by the National Conference of Commissioners on Uniform State Laws (NCCUSL) that is intended to consolidate the law of trusts as it is applied among the states. Although many states have enacted significant portions of the UTC, important distinctions are made as state committees and legislatures review and enact the UTC. It’s safe to say that the Uniform Trust Code is far from “uniform.”

Unitrust: A Trust that provides for a distribution to an income beneficiary of a percentage of the trust assets based on the value of the assets on an annual valuation date (e.g., the first day of the year).

Unlimited marital deduction: A rule permitting spouses to transfer an unlimited amount of assets to each other, while alive or after death, without any income or estate tax implications. Indiscriminate use of the unlimited marital deduction may lead to a loss of the applicable exclusion amount in the estate of the first spouse to die.

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Valuation discounts: Discounts from fair market value allowable because of minority interest, lack of control, and/or lack of marketability.

Vested interest: A present, ascertainable, fixed right of possession or enjoyment of property when actual delivery of the property may be postponed until a later date. Compare to Contingent interest.

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Ward: A minor or incapacitated adult whose affairs are being supervised by the probate court.

Will: A legal document completed in accordance with state law directing the disposition of an individual’s property. A will is not operative until death and can be revoked up to the time of death or until there is a loss of mental capacity.

Will contest: A legal challenge to a Will, usually made by one or more disgruntled heirs. Will contests often are based on allegations that the Will was improperly executed or that the decedent lacked proper mental capacity at the time he or she created the Will or that someone exerted undue influence on the decedent.

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FAQ

Frequently Asked Estate Planning Questions

Thanks for visiting our Estate Planning FAQ page, where you will find valuable answers to frequently asked Estate Planning Questions. Whether you are a client or a potential client, we trust that the answers you are looking for can be found here. Perhaps you might also like to examine the biographical pages of our different estate planning attorneys.

As legal advice must be tailored to the specific circumstances of each case, the information contained here on this FAQ page does not constitute legal advice, and should not be used as a substitute for the advice of competent counsel. Additionally, any U.S. federal or state tax advice contained herein is not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal or state tax penalties that may be imposed. Each person should seek advice from his/her tax advisor based on his/her particular circumstances.

​If after scrolling through these Questions you find that yours is not listed on this page, please feel free to contact us.

 

What is an “Estate?”

Each of us has several different “Estates” for Estate Planning purposes.The first is your “taxable Estate,” which consists of the assets to which an estate tax will be applied at your death. This “Estate” includes all the things that you own or over which you have control at the time of your death. Your “taxable Estate” will include all of your clothing, furniture, jewelry, collectibles, antiques, bank accounts, investments, real estate, retirement accounts, life insurance policies – in short, everything. If there is any question in your mind regarding whether or not something will be includable in your taxable Estate, it is safe to resolve your doubt in favor of inclusion. Since the estate tax is a tax on the transfer of assets, the value of the assets owned by the decedent is the amount that is subject to the tax. That is why a life insurance policy is includable at its death benefit value, not on its cash or surrender value.

The other kind of Estate is your “Probate Estate.” Your Probate Estate consists of all of the things that you personally own at the time of your death. Your Probate Estate does not include joint tenancy or tenancy by the entirety assets, nor assets such as life insurance, retirement assets, annuities, etc., which are controlled by beneficiary designation. Joint tenancy and tenancy by the entirety assets carry with them an automatic right of survivorship, so they pass by operation of law to the surviving joint tenant or tenant by the entirety. A beneficiary designation supersedes the disposition provisions of a Will, Trust or the laws of intestacy, so they are not subject to those documents or laws but simply pass to the person you name as beneficiary on an appropriate beneficiary designation form. Everything in your Probate Estate is also a part of your taxable Estate, but not necessarily the other way around.

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What is an Estate Plan?

There is no single definition of an Estate Plan. An Estate Plan may consist of any number of planning documents. Some basic documents that, in Illinois, are included in most Estate Plans are Living Trusts, Wills, Powers of Attorney for Property, Powers of Attorney for Health Care, Living Wills, HIPAA Authorizations and, in appropriate cases, Appointments of Agent to Control Disposition of Remains. Any documents that control the disposition of assets at death or the handling of your affairs during incapacity are “Estate Planning” documents.Your failure to plan your Estate results in the state in which you are resident at the time of your death planning it for you. There are default rules that control the disposition of your assets at death, and other rules that govern what happens in the event of your incapacity. Unfortunately, those rules do not take your individual circumstances into consideration, and their implementation tends to be time-consuming and, therefore, more expensive than planning your own Estate. The default rules also fail to take estate and income tax consequences into consideration.

A well-drafted Estate Plan may address any of the following issues:

  • Appointing a Guardian to take care of your minor children upon your death;
  • Appointing Agents to make financial and/or health care decisions in the event you are not able to do so;
  • Appointing a Trustee to handle your assets upon your incapacity;
  • Directing the disposition of your assets upon your death in a responsible manner, taking into consideration the ability of your beneficiaries to manage wealth;
  • Providing asset protection for the assets you leave to others at death;
  • Avoiding the probate of your estate at your death;
  • Minimizing, and often avoiding, the payment of federal and/or state death taxes;
  • Providing for the tax-efficient distribution of your retirement assets;
  • Providing for the care of a child with special needs;
  • Authorizing those individuals of your choosing to view medical records and speak with medical professionals with respect to your health care;
  • Expressing your feelings with respect to death-delaying and life-sustaining procedures; and
  • Appointing an Agent to control the disposition of your remains.

The most important thing to keep in mind is that having an Estate Plan means that you control your destiny, rather than leaving major decisions to the default rules imposed by the government.

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Do I need an Estate Plan?
Yes. Whether you are married or single, wealthy or living paycheck to paycheck, have children or not, sick or healthy, everyone needs an estate plan.

How do I choose an Estate Planning attorney?

There are several factors that you should consider in choosing an Estate Planning attorney:

  • Expertise: Estate Planning is one of the most complex areas of the law. Even worse, it changes almost daily. Obviously, you would not hire a real estate lawyer to handle your divorce; nor would you seek a heart specialist for a broken ankle. The same concept applies when it comes to your Estate Plan. The Estate Planning arena is extraordinarily complex when compared to many other areas of law, and the attorney must be well-versed in the areas of federal and state estate taxes, applicable income tax rules and state and federal laws as they relate to Estate Planning.
  • Integrity: Estate Planning is highly personal. You will be sharing the intimate details of your personal and financial life with this professional. Competence is not enough; it is critical that your attorney be highly ethical and above reproach.
  • Compatibility: Estate Planning is a process, and not an event. Ideally, the relationship with your Estate Planning attorney will be a long-term, if not life long, relationship. Compatibility is a critical component of any effective relationship, especially one of long duration.

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How often should my Estate Plan be reviewed?

It is advisable to review your plan on an annual basis. Estate Planning should be viewed as a process not an event.The one constant in life is change. Your personal and financial circumstances are in a constant state of flux. In the same way, and usually unbeknownst to you, the laws that control the effectiveness of your plan are also constantly changing. Federal and state tax laws, and IRS decisions and rulings change almost daily. Finally, statutory and case law, both on the federal and state level, are constantly under review and being changed. Because of all these changes, and their interaction with each other, the estate planning process is continuous. Just as you maintain your car or have regular physical checkups, it is important to maintain your Estate Plan to insure it is keeping up with changing circumstances. The FAMILY LEGACY PLAN established by Huck Bouma PC for its clients is designed to keep estate plans current regardless of legislative or political changes, or changes in a client’s personal or financial situations.

The following are examples of specific personal circumstances that necessitate a plan review:

  • A birth or death in the family;
  • A divorce;
  • A change in your desire for the distribution of assets;
  • A change in your financial circumstances; or
  • A change in one of your fiduciaries, such as your Executor, Trustee, or Agent under a Durable Power of Attorney.

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Can I protect my assets from creditors?
There are limitations on what you can do to protect your own assets from your creditors. Your individual circumstances and the categories of assets you own will determine your asset protection options. There are, however, many ways in which you can make provision for the protection of assets in the hands of your heirs.

Can I protect my assets in the event of a divorce?

If you are already married, there are limited options available to protect “marital” assets from a divorcing spouse. However, if you are not yet married, there are a number of methods that can be employed to protect your assets, including the use of a Pre-Marital or Antenuptial Agreement, appropriately drafted Trust, and asset ownership options. All of these issues should be discussed with an attorney as far in advance of a marriage as possible.There are also effective planning options available to protect your assets from your children’s spouses after your death.

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Will my Living Trust protect my assets if I go into a nursing home?
No. You cannot protect assets in a “self-settled” trust from the claims of your own creditors or from Medicaid.

Is joint tenancy ownership a good idea?

Joint tenancy is the most common form of ownership among married couples with smaller estates. It is often used in an attempt to avoid probate at death. Joint tenancy is rarely, however, an optimal solution, and often leads to unintended consequences.Joint tenancy ownership, by definition, means that, upon the death of one joint tenant, the surviving joint tenant becomes the sole owner of the asset by operation of law. This is a convenient and inexpensive way to avoid Probate and would appear to be a desirable way of passing property to a spouse, child or grandchild since title can pass without court action.

However, there are several possible pitfalls of joint tenancy ownership that most people do not consider. For example, at the time the joint tenancy is created, the person putting the property into joint tenancy may be deemed to have made a gift to the other joint tenant. Although this is not a problem between a husband and wife, it can be disastrous with children and others. By creating a joint ownership interest in someone like a child, creditors of your child may seek to collect a debt owed by your child by attachment or forced sale of the joint tenancy property. If the child becomes mentally or physically incapacitated, the joint tenancy property may be subject to the control of his or her guardian or conservator. The spouse of a child may be able to claim an interest in such property in the event of an unforeseen divorce. A common problem arises when a parent places assets in joint tenancy with one child, and then dies. The surviving joint tenant child becomes the sole owner of the joint tenancy assets, usually to the detriment of the other children, who are left with no legal interest in the parent’s estate.

Even for a married couple, a joint tenancy may cause disastrous consequences. For those couples that have an estate subject to either state or federal estate tax, a joint tenancy may create an estate tax trap. Though successfully avoiding probate of the joint tenancy asset, a far more detrimental consequence is often the result.

In most situations, a more sophisticated estate plan than simple joint tenancy should be used

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What is the difference between an Executor and a Trustee?

An Executor is the individual or entity named in a Will to oversee the administration of assets passing under the Will. If Probate is required, the Court will officially appoint an Executor, and issue “Letters of Office” to the Executor. Letters of Office give the Executor authority to handle the assets involved, called “probate assets.”A Trustee, on the other hand, is the individual or entity named in a Trust to oversee the administration of assets held in the name of the Trust.

Finally, whereas the Executor is discharged when the estate is closed, the Trustee may have ongoing responsibilities pursuant to the terms of the Trust.

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Who is a good choice for an Executor/Trustee?

Any candidate for Executor is usually also a good choice for Trustee, and vice versa. The Executor controls all non-trust assets at death. The Executor is charged with the duty of notifying heirs of estate proceedings, taking an inventory of the estate assets, giving notice to creditors, evaluating and paying claims against the decedent, filing income and estate tax returns as needed, managing the properties of the Estate within the limitations established by the decedent’s will and the probate laws, paying all professional fees and expenses, and eventually distributing the assets of the Estate to heirs and legatees. These same duties fall to a Trustee for all trust assets.A good candidate for Trustee, whether an individual or corporate fiduciary, should possess certain fundamental characteristics. First, and above all, the candidate must be knowledgeable about what a Trustee is and does. A Trustee must be trustworthy, reasonable, well-organized, and responsible, and must possess good listening skills. A Trustee should also have either direct experience with investments, tax laws, legal issues and accounting, or have access to those professionals who provide such expertise. Last but not least, the candidate must be able to get along with the beneficiaries of the Trust and work effectively with them. In choosing a Trustee, keep in mind that a Trustee’s duties may last over a long period of time if Trusts of longer duration are established.

The individual Trustee.

An individual Trustee must be a person of good reputation, have personal integrity and be impartial and free of potential conflicts of interest. If you would like to name a family member as Trustee, you should realistically assess whether the family circumstances are such that the proposed Trustee could be effective in administering the Trust. Family harmony is sometimes very difficult to maintain when one child is given power as Trustee to determine when or whether a sibling will receive discretionary distributions from the Trust. Second marriage situations may present a potential conflict of interest when either the surviving spouse or a child from the first marriage is named to act as Trustee. Where the Trust will hold stock in a family business, naming a child as Trustee who is also a principal in the business may give rise to conflict with beneficiaries who are not employed by the business. An individual serving as Trustee should also be familiar with your philosophy and be capable of implementing that philosophy within parameters of appropriate Trust administration and according to the terms of your Trust. A major reason for naming an individual Trustee is to have a Trustee who matches well with beneficiaries: someone who is understanding, yet not controlling or controllable. Serving as Trustee is serious, time-consuming work. Therefore, it is highly important that you realistically assess whether the personal circumstances of a particular individual will allow him or her to perform the duties of a Trustee. As a practical matter, an otherwise well-qualified individual may be unable to accept appointment for reasons ranging from existing personal and professional responsibilities to poor health.

The corporate Trustee.

If you are considering a Bank or Trust Company as Trustee, you should meet with a representative of the institution to obtain answers to these fundamental questions:

  • Experience: How long has this Bank or Trust Company been in the personal Trust business?
  • Personnel: What personnel does the Bank or Trust Company assign to a personal Trust account? How often are statements distributed? Ask to see a sample statement. Does
  • the person who markets and develops the initial relationship stay in the picture once the Trust is accepted? When seriously considering a particular institution, the client should ask to meet the officer team that would be assigned to the account. Ask how many accounts are assigned to each administrator and investment officer and about the process used for considering requests for discretionary distributions. Inquire about officer turnover; continuity in relationships is essential for establishing Trust and confidence in the institution.
  • Asset management: What is the asset base being managed in personal trust accounts? Does the institution have a clear investment management philosophy? Is the institution willing to accept “special assets” such as real estate or stock in a closely held business? Who does the Trust department’s investment research: outside services or in-house research staff? What is the frequency of portfolio review? How have the institution’s investments performed in the last 10 years? Five years? One year? Last quarter? Last month?
  • Fees: Ask for a copy of the fee schedule and for an example of how fees are calculated in a sample account. Inquire into the circumstances, if any, in which the institution charges “extraordinary” fees. Does the institution customarily assess a fee on termination or resignation? Are any other charges assessed in addition to the scheduled fee? What are the costs of trading securities in the Trust account? Fees are frequently an issue in choosing whether to name an individual or a corporate Trustee. Sometimes a family member or a friend is named as Trustee on the assumption that the individual will not charge a fee. There are several reasons why such an assumption may be misplaced. An individual with expertise may choose to be compensated for acting as Trustee. An individual without expertise may charge a lesser Trustee’s fee, but will need to pay for the services of a range of other professionals, such as an investment manager, attorney, accountant and/or tax advisor, who perform services that are incorporated in the corporate fiduciary’s fee. In addition, the individual Trustee will most likely have to pay higher investment transaction costs. It is therefore best to compare these costs with those of a corporate Trustee before concluding that it “saves” to name individuals.

The “inappropriate” Trustee.

The word “appropriate” implies that some choices may in fact be “inappropriate.” There are times when the selection of either an individual or a corporate fiduciary may be inappropriate for a particular Trust. For example, an individual may be selected on an other-than-rational basis:

  • “His feelings will be hurt if I don’t pick him to be Trustee.”
  • “I’ve got to choose her because she’s the oldest.”
  • “I can’t play favorites; let them all be Trustees.”

Estate Planning is one of those times when individuals are brought face to face with things they do not like to think about: disability, death and taxes. But it is also one of the few times when a person cannot avoid confronting potential or actual conflicts that may exist within family relationships. Where the relationship between a Trustee and a particular beneficiary or group of beneficiaries is not good, trouble is likely to follow. An individual may find it difficult to serve as Trustee of a Trust specifically established for another family member who has had behavioral or financial “problems” in the past. Similarly, a child may not be able to act impartially when serving as Trustee of a Trust established for the benefit of a stepfather he or she has long resented.

There are also times when the selection of a corporate Trustee may be inappropriate. For example, the selected corporation may not be authorized to administer trusts in a jurisdiction where the Trust holds real estate. Corporate Trustees are also increasingly reluctant to accept appointments as Trustees of irrevocable life insurance trusts (ILITs) prior to the death of the insureds. A corporate Trustee may also be an inappropriate choice for a small trust where the fees charged may not be proportionate to the size of the account. Some corporate Trustees set limits on the size of trust that they will accept.

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What is a Trust?

A Trust is an agreement between the Grantor (creator or creators of the Trust), and the Trustee (the person appointed to manage trust assets). The Trustee agrees to manage the Grantor’s property for the benefit of a third person, the Beneficiary.The most common example is a Revocable Living Trust where an individual, John Smith, signs a Trust Agreement (for example, “The John Smith Living Trust”) and then transfers his assets to the Trust. Typically, he would act as Trustee during his life. He is also primary Beneficiary during his life. He then designates a successor Trustee to take over management of his trust assets at his incapacity or at his death, and also creates the rules for distribution of the trust assets at his death.

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What is the difference between a Revocable Trust and an Irrevocable Trust?
A Revocable Trust can be amended, revoked or restated at any time. An Irrevocable Trust, on the other hand, by its terms, cannot be changed or revoked. Irrevocable Trusts are frequently used to keep assets out of the Grantor’s taxable Estate, whereas assets in a Revocable Trust are includable in the Estate of the Grantor for estate tax purposes.
What is the difference between a Living Trust and a Testamentary Trust?
A Living Trust is created during the life of the Grantor (the creator of the trust), and becomes effective as soon as assets are transferred to it. A testamentary Trust, on the other hand, is typically a Trust created within another document, either a Will or a Trust, which is contingent upon the death of the Grantor.Back to top

Do I Need a Trust?

Revocable Living Trusts have been used for many years as a means of avoiding Probate and providing for management of assets in the event of incapacity. The Grantor of a Living Trust generally names himself or herself as initial Trustee, thus creating a Self-Declaratory Trust.The Grantor of the Trust specifies the terms under which the Trustee manages and distributes the property held in trust. It is a “Living Trust” because it comes into existence during the Grantor’s lifetime. It is not a testamentary Trust, which comes into existence as the result of the probate of a Will. A Revocable Living Trust does not require Probate proceedings to validate its provisions.

For individuals choosing to use a Living Trust in their Estate Plan, the Trust becomes the basic instrument of the Estate Plan. All of the property transferred to the Trust is generally held for the benefit of the Grantor during his or her lifetime, and may be held thereafter for the benefit of the Grantor’s surviving spouse. Subsequently, the trust assets are either distributed or held for the benefit of children or others, all according to the directions contained in the Trust Agreement.

In the case of a Self-Declaratory Trust, the Grantor is the original Trustee of the Trust, either alone or with another and, as such, retains control over management of the assets transferred to the Trust. The Grantor will generally remain as Trustee until his or her resignation or until he or she becomes unable to act because of disability or death. Upon the occurrence of any of these events, the successor Trustee designated in the Trust document will take over as Trustee. If the Trust is not self-declaratory, the Grantor names a third party or institution (Trust Company or trust department of a Bank) to act as Trustee. Such a Trustee can, and often does, continue to act even after the Grantor’s incapacity or death.

A Living Trust is created and goes into effect upon its execution and funding (assets transferred to the Trust). The Grantor may revoke or amend the Trust at any time as long as he or she is alive and competent. The Trust becomes irrevocable only upon the death or mental incapacity of the Grantor.

There are numerous Estate Planning objectives that cannot be accomplished other than by creating a Trust and then transferring assets to the Trust. Such transfers can provide important benefits, many of them beyond the potential tax planning that can be accomplished. These non-tax advantages of Trusts should be carefully considered in designing and implementing any Estate Plan:

  • Elimination of probate costs and reduction of other estate administration costs: Fully funded Trusts are generally effective in eliminating the time and expense of a Probate proceeding. Though even fully funded Trusts are subject to administration proceedings upon death, they avoid the delays inherent in a Probate proceeding as well as the court costs involved in such a judicial action. The attorneys’ fees in a Trust Administration are generally substantially less than those incurred in a Probate proceeding. Even when a Trust is not fully funded, and a Probate proceeding is required, the Trustee can continue to manage and dispose of trust property after the Grantor’s death separate and apart from the Probate and Administration proceedings relating to the Grantor’s estate.
  • Placing management of property in hands of Trustee: Frequently a Beneficiary, such as a minor or disabled child, is unable to properly manage and care for the transferred property. A Trust places the duty and responsibility of such management and care in the hands of a Trustee who acts for the benefit of the Trust Beneficiaries. The trust assets can then be distributed to the Beneficiary upon the happening of certain events or the attainment of certain ages, when the disability no longer exists, or the child has attained a level of maturity so that he or she can adequately manage his or her own affairs.
  • Providing flexibility of income and principal distributions over a future period: Often an individual knows the Beneficiaries to whom he or she wishes to transfer property, but is not sure of just how to distribute the property among those Beneficiaries. A Trust permits the Grantor to provide the Trustee with discretion to make appropriate distributions in light of the circumstances prevailing in the future. The Grantor, in drafting the Trust, can insert guidelines for the Trustee to follow in exercising discretionary powers of distribution.
  • Freeing property from the claims of the Beneficiary’s creditor’s (“Spendthrift Trusts”): Trusts are often used to insulate transferred property from the claims of the Beneficiary’s creditors or from the claims of a spouse in the even of a future divorce. The extent to which trusts may be used to successfully serve this purpose depends on state law. For example, a “spendthrift” Trust under the laws of some states will generally protect the trust property from claims of creditors of the
    Trust beneficiary, except to the extent of claims based on items of support furnished to the Beneficiary.
  • Protection of Beneficiary from the Beneficiary’s own imprudence or incapacity: A Trust can also be effective in protecting a Beneficiary from him or herself in that the Trustee, not the Beneficiary, determines the distributions to be made from the Trust for the Beneficiary. A Beneficiary may be unable to conserve his or her estate because of a proclivity for excessive spending, embarking on risky ventures, or similar imprudent actions. A Trust can be useful in preventing dissipation of the Beneficiary’s assets resulting from such unwise actions. Similarly, a Beneficiary, though now competent to manage and care for his or her assets, may in the future suffer an incapacity because of advancing age, illness, drug dependence, alcoholism, etc. A Trust can serve to manage and conserve the Beneficiary’s assets during such a period of incapacity and then, after the death of the Beneficiary, dispose of the Beneficiary’s property in accordance with a plan of disposition arrived at while the Beneficiary was fully competent.
  • Controlling disposition of assets under the law of a particular jurisdiction: The disposition of an individual’s Estate through a Will is generally subject to the law of the state or other jurisdiction in which that person was domiciled at the time of death. In some Estate Planning situations, it may be desirable to have the law of another state control the management or disposition of assets. A Trust may permit application of the more favorable law of a state other than the state of the individual’s residence to the disposition of assets.
  • Ability to provide for estate tax savings, generation skipping transfers, and other planning options: Trusts provide the flexibility to include provisions required to implement most Estate Plans. Credit shelter provisions allowing the married Grantor to take advantage of the estate exemption at each spouse’s death, generation skipping transfer tax provisions, and other estate and gift tax provisions can be included in the Trust to reduce, or even eliminate, estate and gift taxes.

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What is the difference between a Will and a Living Trust?A Will is what Estate Planners typically refer to as a “testamentary instrument.” That means that a will takes effect only upon death. A Living Trust, on the other hand, takes effect as soon as it is signed and funded (assets are transferred to it).Both a Will and a Living Trust are, at their core, a set of instructions for the administration and disposition of assets and payment of administration expenses and taxes at death. A Living Trust, however, also directs the management of assets during life. As a result, if you have a properly funded Living Trust, your incapacity will not require a Guardianship proceeding; your successor Trustee can simply continue to manage the assets in your Trust without court intervention or supervision. Likewise, if you have a Living Trust to which all your assets have been transferred, your Estate will avoid Probate at your death. All of your assets will simply pass according to the instructions you left in your Living Trust and, although an Administration process is still necessary, it is usually accomplished outside the courtroom with the help of your attorney at a lower cost and over a shorter time period than a Probate proceeding.

Even if you have a properly funded Living Trust, you must still have a Will, though it will be companion Will to your Living Trust, often called a Pour-Over Will.

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If I have a Trust, do I need a Will?
Yes. A Will serves as a companion to a Living Trust and is often called a Pour-Over Will. A Pour-Over Will serves several functions, including the appointment of an Executor, the appointment of a Guardian for minor children, the disposition of personal property, and the transfer (pour-over) of non-trust assets into your Living Trust. There are almost always assets outside the Trust at death, and the Pour-Over Will ensures that those assets will end up in the Trust and be distributed along with your other trust assets.

If I am a named beneficiary of a retirement plan, what are my options?

The rules regarding distributions from retirement plans (Traditional IRAs, Roth IRAs, 401(k) plans, Profit Sharing plans, 403(b) plans etc.) are extremely complex and should be discussed with an estate planning professional before any distributions from the retirement plan are made. The answer depends on a number of factors, and is beyond the scope of this forum.For example, if you are the spouse of the owner of the retirement plan, the distribution rules are different than if you are a non-spouse. In either event, you will have a number of options that should be fully explored before a final distribution decision is made. There are also special rules that apply to Trusts and Estates as beneficiaries of retirement assets. Your choice of Beneficiary of a retirement asset will have substantial and serious income and estate tax consequences, so discussion of your options with an estate planning professional is critical.

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Who should I name as Beneficiary of my retirement plan?

The area of retirement plan distributions is one of the most difficult and complex in Estate Planning. The fact that retirement plans may comprise a substantial portion of your Estate makes these decisions especially important.The choice of Beneficiary will depend upon your individual circumstances. The following issues are some you may want to consider when naming a Beneficiary:

  • Do you want your Beneficiary to be able to “stretch” distributions over his or her lifetime?
  • Do you want trust protection for your Beneficiary?
  • Is your Beneficiary your spouse? A child? Another individual? A trust? A charity?
  • Do you want to include trust planning among your retirement distribution options?

These factors, among others, will determine the proper designation of Beneficiary of your retirement assets. Your choice of Beneficiary of a retirement asset will have substantial and serious income and estate tax consequences, so discussion of your options with an estate planning professional is critical.

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How do I plan for a loved one with special needs?
There are many planning options available for disabled or incapacitated individuals, including Special Needs (also sometimes referred to as Supplemental Needs) Trusts. There are several different types of such trusts, so you should consult with an attorney familiar with such planning and experienced in designing and drafting such trusts.
What is the difference between a Will and a Living Will?
A Will is a set of instructions for the administration and disposition of individually-owned assets and payment of administration expenses and taxes at death. A Living Will, on the other hand, is a health care document. It provides a statement of philosophy concerning your desire for treatment in the case of terminal illness, if the procedures in question are only going to delay the dying process. The Living Will is an advance medical directive, along with a Durable Power of Attorney for Health Care and a HIPAA Authorization.

What is a Durable Power of Attorney for Property?

A Durable Power of Attorney for Property is a written document giving authority to an individual (an Agent or “Attorney-in-Fact”) to handle someone’s (the Principal) financial affairs, generally limited to circumstances in which an individual is disabled or incapacitated.This is a very powerful document and should be created with great care. It is also an essential document for everyone over the age of 18.

A Durable Power of Attorney for Property ensures that if, for any reason, you are incapable of handling your own financial affairs due to accident, illness, or unavailability, the person you name (your Agent) can step in and handle these matters for you. The Power of Attorney for Property allows your Agent to manage those assets which you own in your own name, or in which you have a joint tenancy or tenancy in common interest with others. It does not generally give authority to deal with assets in a Trust. Only the Trustee has authority over those assets.

The power is “durable” because it will be effective even if you are disabled or incompetent. This is important because it is at these times that the power is most needed. A properly drafted Durable Power of Attorney for Property can avoid court proceedings (Guardianship) in the event of your incapacity.

It is very important that the person you name as Agent is trustworthy and reliable. You should also name successor Agents to act in the event that your first choice is unable to do so. Under the Illinois Durable Power of Attorney Act, you cannot name co-agents, but only agents to act in succession.

It is also important to understand that the Power of Attorney for Property is void at your death. It cannot be used, for example, to transact business or avoid Probate upon your death. Therefore, the need for a Revocable Living Trust should be carefully considered.

The Durable Power of Attorney for Property does not authorize the Agent to make medical and other health care decisions. Only an Agent under a Durable Power of Attorney for Health Care can make those types of decisions.

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What is a Durable Power of Attorney for Health Care?

A Durable Power of Attorney for Health Care is an available form in Illinois and in most other states. This is the more important of the two advance medical directives in Illinois, the other of which is a Living Will. By signing this document, you entrust your Agent with the legal authority to make medical decisions for you if you are unable to do so or if you are unable to communicate your decisions. As with a Power of Attorney for Property, Agents may not be named to act in concert, but only in succession.The Power of Attorney for Health Care includes the right to make medical decisions, to withdraw life support, and to authorize the donation of vital organs. This document transfers the responsibility of withdrawing life support systems from the attending physician to the person designated as Agent. It lifts from the shoulders of the physician the potential liability for withdrawing life support.

As with Powers of Attorney for Property, a non-durable power of attorney ends when the Principal becomes incompetent while a “durable” Power of Attorney does not. All Powers of Attorney end automatically upon death. If the Principal (you) becomes incompetent, the Durable Power of Attorney for Health Care continues to be valid. You may revoke this Power of Attorney at any time.

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How often should I update my Powers of Attorney?
Powers of Attorney should be updated regularly. Many institutions are refusing to accept or honor Powers of Attorney for Property that are older, some refusing to honor them if they are more than one year old. The newly amended Illinois Power of Attorney Act (effective July 1, 2011) may help in that regard, and financial institutions may be more willing to accept Powers of Attorney signed since the enactment of that amendment (the Act was amended again effective January 1, 2015, but that Amendment affected only the Power of Attorney for Health Care). At Huck Bouma, we continue to update Powers of Attorney for clients enrolled in our FAMILY LEGACY PLAN at least every 5 years.
Why do I need a Power of Attorney for Health Care and a Living Will?
A Living Will applies only if you have an incurable and irreversible injury, disease or illness which is judged to be a terminal condition by your attending physician. It directs your doctors and health care providers to use no artificial, life-preserving procedures to prolong the dying process in that event. Obviously, this document applies only under a very narrow set of circumstances. A Durable Power of Attorney for Health Care, on the other hand, has much broader applicability, and names an Agent to act on your behalf. In addition, under Illinois law, your doctor should seek the input of an Agent acting under a Durable Power of Attorney for Health Care before acting under a Living Will. The Living Will, therefore, is subordinate to a Durable Power of Attorney for Health Care in situations where both documents are present and applicable.

How can I assure that my loved ones will have access to my medical records in an emergency?

A federal law, called the Health Insurance Portability and Accountability Act (HIPAA) was enacted, in part, to safeguard an individual’s medical information. It requires that written authorization be obtained before health care or medical information can be given to anyone, including members of your family.A HIPAA Authorization is a written document that lists the names and addresses of those people to whom you want to give authority to access your medical information and with whom you direct your physicians to cooperate to make sure that they get the necessary information to direct your care.

Without appropriate authorization, physicians and other health care providers cannot, and will not, release your medical information to anyone, potentially including your spouse, children, and others.

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What should I do with my original Estate Planning documents?
Your Estate Planning documents should be kept in a safe, secure place, where they are unlikely to get lost, stolen or destroyed. It is recommended that your Will be kept in a safe deposit box in a bank or in a fireproof safe in your home or office, and that your other Estate Planning documents also be kept in a safe and secure location.
Who, if anyone, should receive copies of my Estate Planning documents?
As long as your loved ones know the location of your documents, copies need not be given to anyone. It is generally not recommended that copies of Estate Planning documents be distributed. Since those documents are likely to change over time, if others have copies of documents it can raise questions about which documents are actually effective. Also, if you change your plan of disposition, you may hurt the feelings of someone who was previously named in an Estate Planning document.

If I become incapacitated how will my affairs be handled?

An important aspect of Estate Planning is the ability to control the management of assets and the medical care to be provided in the event of physical or mental incapacity. It is an unfortunate fact that many individuals will become unable to take care of their own affairs because of physical or mental incapacity.The traditional method for dealing with incapacity has been for the local Probate Court to appoint a Guardian or a Conservator to be responsible for the personal or financial management, or both, of the individual who is deemed to be incapacitated.

Like Probate, this process is expensive and time-consuming. An attorney, and usually an accountant, must be employed, and reports which will detail the financial affairs of the incompetent person, must be submitted to the Court. Annual accountings to the Court are required to be made by the Guardian, and the Guardian is usually required to post a bond. In most cases, the financial status of the protected person becomes a public record, available to anyone who goes to the courthouse and inquires.

Creation of a Revocable Living Trust, along with a transfer of assets to such a Trust, avoids the need for appointment of a Guardian in the event of incapacity. The successor Trustee named in the Trust will automatically become the acting Trustee of the Living Trust upon incapacity and will have the power to manage and distribute trust assets for the benefit of the Grantor without court intervention. A Durable Power of Attorney for Health Care and a Durable Power of Attorney for Property, properly prepared and executed, can also work to reduce the expenses of a Guardianship proceeding in most situations, and may even avoid the necessity of filing such a Guardianship proceeding.

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What do my loved ones need to do upon my death?

A Living Trust provides for the successor Trustee to take over as Trustee upon the death of the initial Trustee. It is recommended that the Executor and Trustee consult with an attorney and an accountant upon the death of a Grantor in order to make sure the administration of the trust assets is handled properly and to assure that the non-trust estate is appropriately administered. The attorney can then advise the Trustee with regard to the following:

Consider Using Qualified Disclaimer(s):

Qualified disclaimers are among the most powerful and effective post-mortem tax and Estate Planning tools. A “qualified disclaimer” is the timely filed written irrevocable and unqualified refusal to accept an interest in property, from which no benefits have been accepted. As a result of such refusal, the interest passes, without any direction by the disclaimant, as though the disclaimant had predeceased the person who gave the interest in the property. A “qualified disclaimer” must be made prior to acceptance of any benefit of the property by the disclaimant. It is imperative the successor Trustee(s), particularly a surviving spouse, review the Estate Plan of the decedent with an attorney prior to accepting the benefits of any property passing from the decedent.

Location and Verification of Documents:

The Executor or the Trustee must first obtain the decedent’s original Trust and Will, and determine if there have been any Amendments or Codicils. Under Illinois law, the Will must be filed with the Clerk of Circuit Court of the county in which the decedent was a resident at the time of his or her death. If there are non-trust assets of sufficient value, a Probate proceeding will be required and an Executor will be appointed. Finally, a sufficient number of death certificates should be obtained to assist in the re-registration of assets and collection of benefits.

Inventory of Assets:

All assets must be located, valued and preserved. A complete and accurate inventory of all such assets must then be prepared for the following reasons:

  • To determine whether a Probate proceeding is required;
  • To determine whether a federal or state estate return tax must be filed and whether any estate tax is due;
  • To identify sources of liquid assets and cash;
  • To divide assets between or among such contingent Trusts as may have been created in the Will or Living Trust;
  • To gather necessary information in preparation for a possible appraisal;
  • To determine whether any liabilities are associated with any of the assets in the Trust; and
  • Generally to assist the surviving spouse, heirs, Executor or Trustee.
  • Collection of Benefits: The Trustee should see to the collection of any benefits owed to the decedent and the decedent’s survivors. These benefits may include:
    • Final salary, wages or other compensation, accrued vacation or sick pay;
    • State or federal disability payments, retirement or disability income, either from federal social security or as a fringe benefit from an employer;
    • Funeral and death benefits from Social Security, the Veteran’s Administration, or as the result of employment agreements;
    • Medical expense reimbursement from health or Medicare supplemental insurance; group or association life and disability income benefits; and worker’s compensation claims;
    • Paid-up life insurance policies for which premiums are not currently being paid; fraternal association or financial institution policies, credit life policies on home, autos and credit cards; term riders on regular policies; accidental death riders on regular life or disability policies; and accidental death policies such as travel insurance, or policies provided when travel tickets are purchased with credit cards;
    • Death benefits due from policies owned by Irrevocable Trusts, or from business insurance such as buy-sell agreements; and
    • Social Security death benefit for surviving spouse or minor children, if applicable.

Probate:

A Probate proceeding may sometimes be appropriate, even if not required, for any of the following reasons:

  • Probate allows the Estate to take advantage of the state creditor notice statutes and shortens the period during which claims against the Estate may be filed. Assets in the Probate Estate will then be primarily liable for decedent’s debts, although Trust assets may be used to pay creditors if probate assets are insufficient for that purpose;
  • A Probate Estate creates a separate tax entity for tax planning purposes;
  • A Probate Estate allows for trapping distributions; and
  • Probate may be necessary under state law if disclaimers are used

Appraisal:

The assets of the Trust or Estate may have to be appraised by a reputable appraiser. This is important whether or not an estate tax return is required:

  • If a Probate proceeding is filed, an appraisal may be required for the accounting necessary in that proceeding;
  • An appraisal may be necessary to value assets for estate tax purposes and to determine whether estate taxes are due; Treasury Regulations provide detailed instructions for the appraisal of various estate assets (Treas. Reg §2031). For example:
    • Personal property such as jewelry, silverware, art, or similar items valued in excess of $3,000 require a professional appraisal (Treas. Reg. §2031-6);
    • Professional appraisals are always needed for real estate;
    • Publicly traded stocks, bonds or mutual funds are valued based upon the mean between the highest and lowest quoted selling prices on the valuation date (Treas. Reg. §2031-2); and
    • A formal appraisal is required for closely held stock and unincorporated business interests (Treas. Reg. §§2031-2 and 2031-3).
  • Appraisals will help establish the current market value for the Trust assets;
  • Appraisals will be needed in order to establish the new income tax “basis” in the Trust assets under Code §1014; and
  • An appraisal may be needed if assets must be divided among contingent Trusts created in the controlling Trust document.
  • If a business or partnership is an asset of the Trust immediate steps must be taken to preserve and protect the enterprise. The Trustee should do the following:
    • Determine whether to continue or liquidate the enterprise and take the appropriate steps after this determination is made;
    • Review corporate or partnership documents and interview partners/shareholders to determine the existence of buy-sell obligations or if business insurance exists; and
    • Contact the accountant for the enterprise for accounting and tax planning advice.

Title to Trust Assets and Probate Assets:

The Decedent’s name should be removed from all assets either through Probate or by the Trustee. A death certificate should be recorded in any county where real estate was owned. The distribution provisions of the Will or Trust must be followed, which may require preparation of deeds or other documents of title. Any deed distributing real estate must be recorded. All non real-estate assets must be re-registered or re-titled to the Beneficiaries’ names.

Tax Issues:

  • The estate tax return, if it is required to be filed, is due nine months following the date of death; a state inheritance tax or estate tax return may also have to be filed. It is advisable to retain an attorney or an accountant experience in preparing estate tax returns;
  • A Revocable Trust becomes irrevocable upon death of the Grantor. Its “grantor trust” status is also terminated;
  • An Irrevocable Trust is required to have an EIN (employer identification number), so appropriate steps must be taken to obtain a tax ID number from the IRS;
  • An Irrevocable Trust must file an annual 1041 tax return;
  • Living Trusts often dictate a division of assets upon the first spouse’s death to minimize the estate tax due on the total Estate. This is generally accomplished by using a Marital Trust and a Credit Shelter Trust. Funding of such separate Trusts cannot be finalized until the valuation of all assets is completed. Valuation of assets is not fixed until such valuation is final for estate tax purposes. This process includes selecting a valuation date. The valuation date is the date of death by default, unless the alternate valuation date (six months after the date of death) is elected. Such an election can only be made if it will decrease the value of the gross Estate and decrease the estate tax. The federal estate tax return (Form 706) is due nine months from the date of death. Asset valuation is generally fixed upon receipt of the estate tax closing letter, but is not finally fixed until the statute of limitations on the estate tax return (three years after the Form 706 is due and has been filed) has expired.
  • Miscellaneous tax matters:
    • The Decedent’s final income tax return is due on April 15 of the year after death;
    • If the Decedent made estimated income tax payments, the payment due after the date of death should be made when due;
    • Real estate taxes on any property owned by the Trust or by the Decedent should be paid when due;
    • Application should be made for tax identification numbers for all Trusts which became irrevocable upon the death of the Decedent;
    • A determination should be made of the amount of cash necessary to pay all liabilities, including estate taxes;
    • Any tax elections available to the Trustee should be made; and
    • A determination should be made of all issues which may affect the Estate’s or the Trust’s income or estate tax liability, such as charitable bequests, unused capital losses, bankruptcy losses and the availability of carry-overs and carry-backs.

Income Tax Returns:

A final income tax return must be filed on behalf of the Grantor. In addition, a Trust may need to apply for an Employer Identification Number (EIN) and income tax returns may need to be filed on behalf of the Trust. Similarly, if a Probate Estate is opened, the Estate must apply for an EIN and may also have to file income tax returns.

With the help and under the guidance of the Estate Administration attorney, the Trustee should inventory all the trust assets, pay the debts as required in the Trust to the extent the Executor named in the Will is unable to pay those debts, and transfer the remaining assets of the Trust to the Beneficiaries named in the Trust agreement.

Once the taxes and debts have been paid, the Trustee should distribute the trust assets to the Beneficiaries. At that point, the Trust terminates, unless other provisions are contained in the Trust agreement which provide for continuing Trusts for a surviving spouse or children. In that case, the Trust continues pursuant to the provisions set out in the Trust agreement until all Trusts terminate.

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What is Probate (“Estate Administration”)?

The traditional method of passing property in an Estate is through the Probate process. This is true whether the decedent had a Will, and therefore died “testate,” or had no Will, and therefore died “intestate.” In either case, a petition is filed with the Probate Court upon death, and a judicial Probate proceeding is required to administer and settle the Decedent’s Estate. In Illinois, Probate is required for all Estates where the total value of “probate” assets owned by the Decedent is in excess of $100,000 in value. The term “probate assets” refers to those assets individually owned (as opposed to ownership in joint tenancy with a right of survivorship), for which no beneficiary designation or other “pay upon death” designation has been made.The Executor must first file the Will. The Executor is appointed in the Will of the Decedent. After filing the Probate proceeding, the Executor (or Administrator) is officially “appointed” by the Court, which issues “Letters of Office,” giving the Executor or Administrator legal authority to act. The Executor is charged with the duty of notifying heirs of Estate proceedings, taking an inventory of the Estate, giving notice to creditors, evaluating and paying claims against the Decedent, filing income and estate tax returns as needed, managing the assets of the Estate within the limitations established by the Decedent’s Will and the Probate laws, and eventually distributing the Estate that remains after payment of attorneys’ fees, Executor’s fees, estate and income taxes, and other costs of administration.

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When and where do I file my Will?
Under Illinois law, the Executor must file the Will within thirty days after death with the Clerk of the Circuit Court of the county in which the Decedent resided at the time of his or her death.

What happens if I die without a Will?

If the Decedent died without a Will (“intestate estate”), the Estate will be managed and distributed according to the laws of the state in which the Decedent resided at the time of his or her death and any others in which he or she owned real estate.For a Decedent who dies without a Will, instead of being able to select beneficiaries and the terms under which the Estate will be passed to them, the state legislature, speaking through the Probate laws, will dictate the distribution of the Estate, which may or may not conform to the Decedent’s desires. The Decedent’s wishes and any special needs of loved ones will certainly not be considered.

Probate of an intestate Estate is also usually more expensive because the Court has no direction from the Decedent regarding choice of Executor, surety on the bond of the fiduciary hasn’t been waived, and other important issues. A surety bond must therefore be posted by the Administrator in order for the Administrator to act. The Administrator is usually appointed by the Court based on an order of priority set forth in the state Probate laws.

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Does my Will avoid Probate?
Although Probate can be avoided in many ways, a Will does not avoid probate. In fact, a Will requires Probate if the assets passing under the Will exceed $100,000 in total value. Assets such as life insurance, annuities, retirement funds, and IRA accounts can avoid Probate if a proper beneficiary is designated. Designating your Estate is not an advisable option. Assets titled in joint tenancy pass automatically to the surviving joint tenant and thereby avoid Probate. However, joint tenancy can create a tax trap, and result in loss of control over the property, as discussed elsewhere on this site. Certain designations such as “POD” (pay on death) or “TOD” (transfer on death) also avoid probate. These too, however, have drawbacks which should be carefully considered before they are employed.

What can I do now to prevent Probate at my death?

By far the best way to avoid Probate is through the use of a properly funded Revocable Living Trust. A Trust is defined in more detail elsewhere on our site. However, a Living Trust is basically a document that contains your wishes for the administration of your assets, both during your life and after your death. Your assets must be transferred to your Trust during your life if the Trust is to accomplish Probate avoidance. If you choose, you can be your own initial Trustee (Self-Declaration of Trust) and thereby control your Trust assets yourself. At your disability or death, the successor Trustee named in your Trust will administer your trust assets as you instruct. Because the assets are not in your name (they are in the Trust’s name), they avoid Probate.It is important to understand that Probate and federal estate taxes have nothing to do with one another. In 2012, for example, each individual is allowed to pass assets valued at $5,120,000 with no federal estate tax. This does not mean that these assets will not be subject to Probate. Probate is the administration of your estate, and estate tax is the transfer tax on all of the assets you own at your death (probate and non-probate).

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What expenses will my estate bear at my death?

In most situations, there will be some “administration expenses” when you die. These can be minimized through the use of a well-designed and properly drafted Estate Plan, but they can generally not be avoided altogether. Expenses may include:

  • Executor’s fees;
  • Trustee’s fees;
  • Income taxes;
  • Estate taxes;
  • Legal fees;
  • Accounting fees;
  • Appraisal fees;
  • Expenses of a last illness; and
  • Court costs, if Probate is required.

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Will my Estate be taxed at my death?

All assets in which you have any ownership interest at the time of your death are subject to estate taxes. These include life insurance proceeds payable at death, interest in joint tenancy assets, retirement funds, homes – everything.However, the law provides you with some relief. All assets passing to a surviving spouse generally pass free from estate tax regardless of value. This is the result of the unlimited marital deduction, which provides that assets transferred to a surviving spouse at death are not subject to taxation. As the term indicates, this deduction is unlimited.

Additionally, we are each given an exemption against federal estate taxes for assets passing to a non-spouse beneficiary. Pursuant to the Tax Cuts and Jobs Act of 2018, that exemption is permanently set at $10 million, adjusted for inflation ($11,200,000 in 2018). This simply means that if the value of your total estate, net of bills and expenses is $11,200,000 or less, there will be no federal estate tax due. If your estate exceeds the exemption amount, the effective tax rate is 40% of the amount over the exemption.

In addition to the federal estate tax, Illinois has an estate tax. The state of Illinois does not tax estates of $4,000,000 or less. If the estate exceeds $4 million in total value, Illinois will tax the estate in its entirety, at rates ranging from 5.6% to 16%.

Are there any planning opportunities to reduce the estate tax for a married couple?

Most Americans are no longer subject to the federal estate tax because of the high exclusion ($11,200,000 in 2018). However, it remains potentially the largest tax that most people who are subject to it will ever confront, with a flat rate of 40%. It is, however, also the one tax that can most easily be minimized. Substantial estate tax savings opportunities are available by applying conventional Estate Planning techniques to a given individual’s estate. In order to understand estate tax planning opportunities, an explanation, and a short history, of the federal estate tax is in order.When portability was made permanent by President Obama in the American Taxpayer Relief Act of 2012, it basically meant that married couples had the opportunity to double the exclusion amount from $11,200,000 to $22,400,000.

Reunification and Applicable Exclusion Amount.

Under the Tax Cuts and Jobs Act of 2018, gift and estate taxes remain unified, minimizing the effect of the choice to make a gift during life or at death. The “applicable exclusion amount” under IRC §2010 is set at $10,000,000 and this amount is indexed for inflation in multiples of $10,000 beginning in 2012 by IRC §2505, with the result that beginning January 1, 2018, the so-called “unified credit” for gift and estate taxes is $11,200,000.

Estate tax rates.

Estate tax rates are simply truncated by the Act at the top marginal rate of 40%.

Marital Deduction.

One of the most important and significant features of the federal estate tax is that a Decedent is entitled to a deduction from his or her gross estate for any amount left to a surviving spouse. This deduction is known as the “unlimited marital deduction.” In order to be deductible under this provision, the gift to a surviving spouse must be of a non-terminable interest (except as set forth below) and must “qualify” for the marital deduction. The purpose of the requirement of qualification for the marital deduction is to insure that the amount left to a spouse be left in such a fashion that it will eventually be included in the surviving spouse’s taxable estate. A direct gift, with no strings attached, automatically qualifies. In order for a trust to qualify for the marital deduction it must provide that the spouse (1) have at least a right to all of the income from the trust payable at least as frequently as annually; and (2) have a general power of appointment over the corpus of the trust that can be exercised in his or her will. A general power of appointment means that the spouse is free to decide who gets the corpus of the trust at his or her death and in what proportions. The federal estate tax provides for a statutory exception to the requirement that a gift to a surviving spouse be non-terminable; this exception is for “Qualified Terminable Interest Property” (QTIP). The Decedent can create a QTIP Marital Trust which restricts the surviving spouse’s access to and control over the Marital Trust corpus during his or her life and at death, so that the Decedent can control the ultimate disposition of the QTIP Marital Trust corpus at the surviving spouse’s death (to assure that the property in the trust passes to the Decedent’s children, for example). The Executor must elect to accept this requirement at the decedent’s death. Ordinarily this is not an issue, since making the QTIP election means that the trust is larger during the surviving spouse’s lifetime by the amount of federal estate tax that is saved by making the election than it would be if the Executor refused it. Thus, the surviving spouse will enjoy a significantly higher amount of income from the QTIP trust than if the Executor had not made the election. The requirement that all income be paid to the surviving spouse during his or her life is also a requirement of QTIP Marital Trusts.

Since the marital deduction is “unlimited,” it would seem to make sense for a married individual to rely completely upon the marital deduction to shelter his Estate from estate tax upon death. This leads, however, simply to a postponement of estate tax, rather than to complete avoidance. Upon the death of the first spouse to die, if all property passes to the surviving spouse, no tax will be payable when the first spouse dies; the tax will simply be deferred until the death of the surviving spouse, when all property previously transferred to that spouse will be included in the surviving spouse’s estate, subject only to available credits in that estate or portability of the unused exclusion in the predeceased spouse’s estate (see below). In an ultimate sense, therefore, no tax savings have been accomplished since the unified credit available to the first spouse to die was not used. That is the case in most situations where a married couple holds the majority of its assets in joint tenancy and each names the other as Beneficiary of all life insurance, IRAs and qualified retirement benefits: all such property qualifies for the marital deduction and none of it for the applicable exclusion amount. An Estate Plan utilizing a “credit shelter trust” can maximize each person’s available exclusion amount and shelter up to $10,860,000 ($5,430,000 in the estate of each spouse) from federal estate tax. Additional tax savings can be accomplished through the use of a gifting program to reduce overall Estate size (see below), or by incorporating more sophisticated planning vehicles into the Estate Plan. Each individual should discuss these, and other, options with his or her Estate Planning professional.

“Portability” of the Applicable Exclusion.

Portability is the ability for a surviving spouse to use any applicable exclusion amount left unused by his or her predeceased spouse. Thus, for example, if Spouse A dies using only $2,000,000 of his $11,200,000 applicable exclusion amount, then upon the subsequent death of Spouse B, she may use her $11,200,000 plus his unused $9,200,000, for a total of $20,400,000. To prevent serial credit collection, the law allows the portability of the unused applicable exclusion amount of only the last spouse to die. It is important to note, however, that a portability election must be made on an estate tax return filed in the Estate of the first spouse to die in order to preserve it in the Estate of the surviving spouse. Thus, if the surviving spouse wishes to preserve her predeceased spouse’s exclusion amount, an estate tax return will need to be filed at the death of the predeceased spouse, whether or not that estate is a taxable estate or not. In the absence of such a filing, portability of the unused estate tax exclusion amount from the predeceased spouse’s Estate to the surviving spouse’s Estate cannot be accomplished. For many reasons, portability should be viewed as an adjunct to proactive estate tax planning, rather than a substitute for it.

Generation–skipping transfer tax.

The so-called GST exemption is equal to the applicable exclusion amount, now $11,200,000, as imported by reference by IRC §2631(c).

Gifts.

It is often appropriate to make gifts during life to intended beneficiaries. Gifts accomplish a number of important objectives, including the reduction of the size of an Estate (and thus the estate tax consequences upon death), and being able to participate in the Beneficiary’s enjoyment of the property gifted. In 2018, each person may give up to $15,000 ($30,000 per married couple) each year to any number of different individuals without any gift tax consequences, as long as the gift is of a present, nonterminable, interest. Such gifts are known as “annual per donee exclusion gifts.” There are a number of technical requirements for qualification of such gifts for the annual exclusion; before making such gifts, an estate planning professional should be consulted. These annual exclusion amounts are indexed for inflation, so the actual amount of the exclusion will change slightly over time. There is also a lifetime gift tax exclusion of $11.2 million in 2018.

Gifts in excess of $15,000 ($30,000 per married couple) per year per donee can be made, but there will likely be gift tax consequences to making such gifts. In appropriate situations, a gifting program can have a substantial impact upon gift and estate tax liabilities, and such a program should be explored in all cases where an estate tax is likely to be due at death.

A gift can be made directly to an individual, or it can be made to a properly drafted Trust for the benefit of one or more individuals. In any event, a gift should only be made if the donor will not, under any reasonably foreseeable circumstance, have need of the property and if the cash needs of the donor are certain to be sufficient for all his or her needs. Property given directly to the donee is no longer available to the donor. If the donor attempts to keep control of the gifted property, problems, including litigation, can and do arise and the amount of the “gift” may remain in the donor’s taxable Estate for federal estate tax purposes.

An exception to the gifting rules described above is the direct payment of tuition and medical expenses on behalf of an individual. The payment of tuition directly to an educational institution on behalf of a donee or the payment of medical expenses directly to the provider of the medical treatment do not constitute taxable gifts, no matter the amount of those payments.

The federal estate tax is a tax on all transfers of assets made at death. An individual’s taxable Estate consists, therefore, of all assets owned outright by the Decedent at the time of his or her death, but also includes assets in which the Decedent was deemed to have sufficient incidents of ownership and/or control to cause those assets to be included in the taxable Estate. The federal estate tax will also reach assets that were given away in contemplation of death, life insurance policies in which the Decedent had an incident of ownership, Trusts created by the Decedent over which he or she retained administrative control or power, joint tenancies or other joint interests in which the Decedent had an interest, property given away with a retained life interest, and other arrangements that are the substantial equivalents of these enumerated items.

Illinois State Estate Tax.

The State of Illinois has an estate tax, decoupled from the federal estate tax, with a threshold of $4 million dollars in 2018. The $4 million threshold is not an exclusion, per se, since it “disappears” for any Estate of over $4 million. Thus, for Estates below $4 million, there is no tax, but for estates over $4 million, there is a tax on the entire Estate, with no exclusion from the tax.

Illinois also brought back the state QTIP election, thereby allowing decedents to plan for both the federal and state marital deductions. With proper planning, this permits a married couple to postpone taxation, regardless of Estate size, of both the federal and state estate tax until the death of the last spouse to die.

What can I do to minimize or even totally avoid the estate tax?

For many people, the minimization or elimination of estate taxes becomes the primary focus of their Estate Planning. Though tax considerations are certainly important, they should not drive the Estate Plan design; in other words, the tax tail should not wag the planning dog. The primary objective of any Estate Plan should be the disposition of assets to the Beneficiaries you intend, in a manner consistent with your wishes, taking into consideration the age and aptitude of those Beneficiaries, and the protection of minors and those not able to manage their assets themselves. In other words, responsible wealth transfer is far more important than simple tax avoidance. In most circumstances, the two objectives are not mutually exclusive. Asset protection may also be an overriding concern, one that trumps estate tax planning.Having said that, however, there are a number of things that can be done, within the planning process, to minimize, or even eliminate, in some cases, the estate tax. Since the size of your Estate determines the amount of tax that will be owed, the extent to which you can reduce the size of your Estate will correspondingly reduce the amount of tax that will be owed at your death. There are several ways that this can be accomplished: (i) if you are married, taking advantage of the applicable exclusion amount for both spouses; (ii) making lifetime gifts that remove assets from your estate; (iii) charitable planning; (iv) valuation discount planning; (v) other sophisticated planning.

Gifts fall into a number of different categories. Charitable gifts give you a dollar-for-dollar credit against estate taxes. Gifts to charitable trusts can provide you with an ongoing stream of income and provide you with an income tax deduction, and reduce your Estate at the same time. Gifts to individuals can be present interest gifts, or future interest gifts, such as gifts to Trusts for the benefit of a child, where the child benefits in the future. An effective use of gifting is to give away something that has little value during life, but a substantially higher value at death, such as a life insurance policy. Imagine being able to reduce your taxable estate by several hundred thousand dollars simply by transferring a life insurance policy to a Trust, rather than owning it yourself.

You can also leverage your gifting, by using vehicles such as Grantor Retained Annuity Trusts or Family Limited Partnerships. A discussion of such methods of estate tax reduction is beyond the scope of this brief explanation.

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Is making gifts a good way to reduce the size of my Estate?

Making gifts is often a very effective way to reduce the size of your Estate. Although all gifts are taxable, there are several gift tax exclusions of which you can take advantage. The first is the annual exclusion (also called the annual per donee exclusion), which exempts annual present interest gifts of $15,000 (indexed for inflation) per “donee.” Simply put, each individual can make present interest gifts of $15,000 per year to an unlimited number of people. Thus, if you have 3 children, you can make a gift of $15,000 to each of them this year, and then again each year thereafter. Each of those gifts qualifies for the annual exclusion. If you are married, each spouse can make such gifts, resulting in total gifts of $90,000, without gift tax consequences in the example above. Assuming that each of those 3 children is married and has 2 children of their own, a married couple can now make gifts each year to the 3 children, their spouses, and their children, thus effectively reducing the couple’s taxable Estate by $360,000 (12 donees times 2 donors times $15,000) each year with no adverse gift tax consequences. You also have a lifetime gift tax exemption of $11.2 million in 2018. So, in addition to the annual exclusion gifts mentioned above, you may make gifts using your lifetime gift tax exemption. To the extent that the lifetime exemption is used during life, it will not then be available for transfers at death. From a tax perspective, however, lifetime gifts are almost always more advantageous than gifts at death, because (i) gifts are tax exclusive while bequests are tax inclusive, (ii) as the money you give away grows in value, that value is also outside your taxable Estate, and (iii) any income earned by the gifted funds is income to the recipient, rather than being income to you.Before engaging in a gifting strategy, we highly recommend discussing that strategy with an Estate Planning professional. How a gift made today will be treated when, and if, the law changes, is still an open question, and you should understand the risks and consequences of making any lifetime gifts.

An effective use of your annual gift tax exclusions and your lifetime exemption is to give away assets that have a low value while you are alive and a much higher value at death (in making lifetime gifts, you should also consider the effects of carry-over income tax basis of the assets being gifted). The prototypical asset that falls within this category is a policy of life insurance. During your life, a life insurance policy has a relatively low value, but at your death, the full death benefit will be subject to the estate tax. Making gifts to irrevocable Trusts, such as a Grantor Retained Annuity Trust, can also effectively leverage your gift tax exemption by allowing you to give away more than the actual value of the gift.

A gift can be made directly to an individual, or it can be made to a properly drafted Trust for the benefit of one or more individuals. In any event, a gift should only be made if the donor will not, under any reasonably foreseeable circumstance, have need of the property and if the cash needs of the donor are certain to be sufficient for all his or her needs. Property given directly to the donee is no longer available to the donor. If the donor attempts to keep control of the gifted property, problems, including litigation, can and do arise and the amount of the “gift” may remain in the donor’s taxable estate for federal estate tax purposes.

An exception to the gifting rules described above is the direct payment of tuition and medical expenses on behalf of an individual. The payment of tuition directly to an educational institution on behalf of a donee or the payment of medical expenses directly to the provider of the medical treatment do not constitute taxable gifts, no matter the amount of those payments.

Is life insurance taxed at my death?
It is very important to distinguish between income taxes and estate taxes. Most people have the understanding that life insurance proceeds are not “taxable.” In most cases life insurance proceeds are not subject to income taxes. However, the proceeds of a life insurance policy over which the Decedent had any incidents of ownership are subject to estate taxes. Income taxes and estate taxes are two entirely different forms of taxation, and should not be confused.Estate taxation of a life insurance policy depends on who owns the policy at death and who has control over the various aspects of the insurance contract, such as the right to change Beneficiaries, to borrow against the policy, etc. If the Decedent owns the policy or has any incidents of ownership, the policy proceeds will be includible in his or her taxable Estate, and subject to estate tax. If the Decedent does not have any incidents of ownership (for example, if the policy is owned by an Irrevocable Trust of which the Decedent was not Trustee and over which the Decedent had no control), the proceeds will generally not be includible in the Decedent’s Estate for estate tax purposes. The single exception is a life insurance policy that was transferred to an Irrevocable Trust by its owner. In that event, the policy will continue to be included in the taxable Estate of the person transferring the policy until 3 years have passed from the date of transfer. This 3-year rule does not apply to policies initially purchased by an Irrevocable Trust, as opposed to having been transferred to such a Trust.